The more VAT is simplified, the more complex it becomes
Wednesday 27th July 2011
Hard though it is to believe, Anthony Barber, the Chancellor of the Exchequer who introduced VAT in 1973, described it as “a simple tax”.
Since then, there have been hundreds of new measures, guidance notes and law changes designed to “simplify” its application – and thousands of VAT tribunal and court cases which show only that many businesses completely fail to understand it.
In 2010 a VAT Package was introduced at EU level with the intention of simplifying rules across Europe. Eighteen months on, Buzzacott’s VAT Team continue to field questions about the changes introduced. Though it is not altogether unexpected that many businesses are unaware of the changes and the potential impact on their trade in the EU, their lack of knowledge, when taken with official keenness to impose penalties for innocent mistakes, is deeply worrying.
Given that each so-called simplification has only resulted in more complications for business, you could argue that the last thing needed was more of the same. However, the EU Commission do not agree. At the end of last year, they launched a consultation which ended this May entitled “Green Paper on the future of VAT: towards a simpler, more robust and efficient VAT system”.
The Commission says within the paper that the approach they have followed in the last decade has been to simplify and modernise the current system by increments. They say this has produced positive results, but now believe the current system has “reached its limits”. Basically, they want to scrap the system as it stands and start again.
The 23-page document contains a list of 33 questions which the Commission were hoping businesses would respond to, to help them shape a new VAT system. One example, Question 25, asks: “should additional simplifications be considered and what should be their main elements?”
Some of the items being considered would have a significant effect on our clients. There is even a suggestion that VAT could be ignored between businesses, effectively taking the EU towards a sales tax system or a modified version of one. The idea is in response to the massive levels of VAT fraud in Europe.
Another suggestion is that, instead of the VAT exemptions currently in place, VAT could be charged on all cross-border supplies of goods and services at the prevailing rate in the country of destination. This would mean businesses have to know the VAT rates of all goods and services in other countries, and possibly require a clearing system to ensure the tax was paid where it should be paid!
The paper suggests that public bodies currently exempt from VAT could be brought within its scope. Currently, exemptions apply to a number of suppliers, including financial services, gambling, education and land transactions. The paper floats the idea of removing some or all of these exemptions.
The Commission has long sought a common VAT rate across the EU, and this is again mentioned. This time, though, they mention a single rate applying to all goods and services, which would result in the UK losing its zero and lower ratings.
A big part of the paper relates to the collection of the tax. Among the ideas suggested is a “split payment method” whereby a customer instructs their bank to pay the net invoice amount to their supplier and the VAT straight to the tax office. Banks may love the idea of doubling their charges for each payment; on the other hand, previous discussions on a modified version of this idea met with little enthusiasm from the banking community.
The Commission plans to publish the results of this consultation by the end of 2011. We shall monitor how this latest simplification complicates our clients’ affairs.