The Office of Tax Simplification (OTS) published its VAT review which offered a range of proposals for simplifying tax. The report followed a Call for Evidence at the start of 2017, to which CTG submitted a detailed response (see below), following a meeting with OTS officials.

CTG undertook a detailed review of the report but welcomes the recognition by the OTS that guidance needs to be updated regularly and that the administration of VAT (including the administration of the partial exemption rules) should be simplified.

Review of the current reduced rate, zero rate and exemption schedules, could, as our response to the Call for Evidence demonstrates, ensure that VAT reliefs are future-proofed (and able to cope with technological developments) and fit for purpose, as well as identifying opportunities for supporting charities through the VAT system. However, at the same time, it is important that this process does not result in inadvertent costs for charities and there is no removal of the invaluable zero rates charities benefit from. Importantly the report highlights the VAT disadvantage for organisations (which includes charities) that provide outsourced services (such as adult social care) compared to their local authority/ NHS equivalents) and the need for a review of VAT arrangements in these circumstances. Suggestions to improve the rulings and penalties processes are also very welcome.

OTS Recommendations 

(1-8 are the Review’s core recommendations)

1. The Government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism
2. HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
3. HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed
4. HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS
5. The Government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations
6. HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications
7. The Government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold
8. HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
9. HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
10. HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
11. HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
12. HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
13. HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
14. HMRC should consider introducing electronic C79 import certificates.
15. HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
16. HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
17. HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
18. HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
19. HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
20. The Government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
21. The Government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
22. HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
23. HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.

The report indicated which recommendations could be progressed in the short term (1 year), medium term (2 to 5 years) or long term (5+ years). Where appropriate, those recommendations which could not be implemented under present EU law are identified.

Original Call for Evidence and CTG response

Following the publication of an interim report on its review of the UK’s VAT system, the OTS opened a call for evidence to help develop its ideas on how to create a sustainable VAT system for the future that imposes minimal burdens on business.

Following a meeting with the OTS Review team and consultation with members, CTG submitted a detailed response to the consultation.

In the response CTG welcomes the efforts being made to reduce unnecessary bureaucracy and to simplify the VAT system. This is long overdue and reform would have a positive impact in terms of administrative costs for charities. However, we noted that it is important that this process does not result in inadvertent costs for charities and there is no removal of the invaluable zero rates charities benefit from.

CTG identified the Review as an important opportunity to address long-standing structural obstacles facing charities in the VAT system, be that through the introduction of a special refund scheme for charities in relation to their non-business activities, or by extending the existing reduced and zero rates on supplies to charities to cover all supplies to charities in addition to the reduced rate for supplies by charities.

CTG’s response also commented on the specific technical and practical questions raised in the review, on topics including partial exemption, VAT registration threshold, guidance and penalties. The response provided detailed feedback on the scope of existing reduced and zero rates and recommendations for improvements, particularly in relation to scope of the RCP definition and other charity specific reliefs.