OTS’ recommendations to simplify VAT

During the 2017 Autumn Budget, the Chancellor of the Exchequer, Phillip Hammond, announced that the VAT threshold would be frozen at £85,000 for the next two years.  The Chancellor was advised to make changes to VAT by the Office of Tax Simplification (‘OTS’) as the UK has the highest VAT threshold in both the EU, where the average threshold is £20,000, and the highest general Organisation for Economic Cooperation and Development.

OTS report

The OTS published a report in November 2017 setting out a high-level review of VAT, directed at key areas where simplification of either law or administration would be worthwhile. They have eight key recommendations contained in their executive summary and many more throughout the report.

The OTS perceive that a current problem with the £85,000 threshold is that a large proportion of companies ‘bunch’ just short of the threshold to avoid the financial costs and administrative burden of operating VAT. It can be argued that this encourages businesses to limit their expansion short of the £85,000 threshold or some businesses may deliberately suppress their recorded takings and report a turnover below the threshold. In response the OTS has recommended that the Chancellor examines the current approach to the level and design of the VAT registration threshold. The OTS could reduce the threshold by a small amount to encapsulate the companies bunching up short of the threshold and would increase their tax compliance costs. Reducing the threshold by a significant amount (e.g. £41,000) would impact approximately 500,000 businesses Whilst increasing compliance costs for a large number of businesses it also raises between £1bn and £1.5bn a year for the Government – some of which would need to be spent on additional funds for HMRC to deal with increased amounts of VAT registrations.

To “smooth” the change in threshold, the OTS have suggested introducing a time-limited reduction in the VAT Flat Rate Scheme (‘FRS’) rate for newly-registered businesses.

OTS states that the FRS is expected to continue to be available under Making Tax Digital however only approximately 31% of all eligible businesses use it. OTS comments that a larger reduction in the first year of registration, or a continuation of it into the second or third year of registration might encourage more businesses to grow above the threshold. OTS believe support in a businesses’ first here years would be targeted at their most vulnerable period as, in the UK, just over 40% of businesses survive their first five years.

OTS comment that the percentage reduction for businesses with limited taxable inputs may need to be lower than for other businesses, to reduce the risk of abuse. 

Aspire Comment

On the day of the Autumn Budget 2017 the Chancellor published a response to the OTS’ report  addressing the eight key recommendations in turn and also references that HMRC and HM Treasury officials will work with the OTS on an additional fifteen recommendations.

The Chancellor does not indicate to a change in the VAT threshold or to the FRS, however, post-Brexit the Chancellor may have a variety of options to change VAT. In accordance with the announcement at Budget, one thing we can be sure of is that he threshold will remain the same for at least two years.