Should you make your Gingerbread men with eyes or trousers? THP spills the beans…….

The Office of Tax Simplification (OTS) has published a report setting out a range of proposals for simplifying VAT. According to the OTS, this tax is now showing its age. What was meant to be a simple direct tax has since become highly complex and it has not kept pace with changes in our society.

The most significant issue identified in the report is the VAT registration threshold – the turnover level above which a business must enter the VAT system and charge VAT on its sales. At £85,000 the UK has one of the highest levels in the world.

By enabling many small businesses to stay out of the VAT system this high threshold is a form of simplification but it’s an expensive relief. It costs around £2bn per annum and evidence strongly suggests that many growing businesses are discouraged from expanding beyond this point. The report looks at options for reducing the current ‘cliff edge’ effect resulting in a very visible bunching of businesses just before the VAT threshold and an equally large drop off in the number of businesses with turnovers just above the threshold. Also examined are the advantages and disadvantages of lowering or increasing the VAT threshold.

The VAT system has many ‘quirks’.

For example, did you know that a Jaffa cake is a cake (zero-rated) rather than a chocolate-covered biscuit (taxed at 20%)? Less well known is that while children’s clothes are zero-rated, including many items made from fur skin, items made from Tibetan goat skin are standard-rated. And a ginger bread man with chocolate eyes is zero-rated but if it has chocolate trousers it would be standard rated.

Items that are zero rated for VAT cost the country over £45bn per annum. Until and possibly beyond Brexit our requirement to follow EU law limits options to make changes in this area. Longer term, however, there is a real opportunity to significantly improve the efficiency, simplicity and fairness of the UK VAT system.

The OTS report will need to be examined in some detail. It will be interesting to see if we can achieve a real simplification of this complex tax or if smaller businesses will continue to have to absorb more red tape and a greater share of the tax burden, while larger businesses with stronger lobbies and resources continue to avoid liability.

For help with anything VAT related please get in contact with our VAT experts on 020 8989 5147 or by completing one of our online enquiry forms.

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