VAT split payments to come to the UK?

When it comes to VAT payments, there’s one major benefit for businesses. Because they only have to submit VAT returns and pay over any owed VAT once every quarter, cashflow can be improved for the period businesses hold on to the VAT. However, this may be set to change after two successful proof-of-concept (POC) projects using ‘VAT split payments’.

What are VAT split payments?

If you were to buy a product or service using a VAT split payments system, the VAT element of your payment would get sent directly to HMRC. This benefits the taxman as he gets the money quickly. It also simplifies VAT returns, reducing fraud and missed payments. While it cuts red tape for businesses, it does mean that they don’t have the use of the VAT money between VAT returns.

Are VAT split payments used elsewhere?

Yes, VAT split payments are used in Poland for B2B payments on products considered to be a fraud risk. Split payment systems are also popular in South America. They are used in different forms in countries such as Columbia, Mexico, Paraguay and Chile. Nearer to home, a VAT split payments review is currently taking place in Holland.

What’s happening with split payments in the UK?

In 2018, HMRC undertook a consultation on VAT split payments. Respondents said that such a system would be technologically possible, but it could make compliance complex. Cashflow and cost were also viewed as sticking points. Businesses felt that any split payments system would need to be simple to develop and comply with.

In 2004, HMRC undertook two proof-of-concept projects with payment technology companies. These included providers of credit cards, online payment services and e-wallets.

One of these POC projects focused on sales of e-commerce goods and services by non-UK-resident merchants. The aim was to see whether such a system could eliminate non-compliance and fraud. Using simulated transactions, it found that split payments were technically feasible.

Will the UK’s VAT system change?

Given HMRC’s successful VAT split payment projects, it’s certainly very likely we’ll see some kind of split payment system in the future. Doing so would be to follow a global trend towards the use of such systems.

That said, HMRC is in the process of introducing major changes to the tax system. Making Tax Digital for Income Tax is being phased in from April 2026. There is still no fixed date for introducing MTD for Corporation Tax.

Given this, it’s likely that any move towards VAT split payments is a few years away. What will be particularly interesting is how HMRC integrates any new system with the current VAT system. Will it mandate VAT split payments on some products and services, but not others? If so, how easy will it be for businesses to account for VAT?

Until HMRC announces any changes, the VAT system will remain the same. However, it’s still important to make sure you are signed up to the most beneficial VAT scheme for your business. If you’d like any advice, our VAT returns service can help you get to grips with all aspects of Value Added Tax.