TREASURY COMMITTEE VAT INQUIRY

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1 TREASURY COMMITTEE VAT INQUIRY Response by Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to provide evidence to the House of Commons Treasury Committee inquiry into VAT The primary charitable objective of the ATT is to promote education and the study of tax administration and practice. We place a strong emphasis on the practicalities of the tax system. Our work in this area draws heavily on the experience of our members who assist thousands of businesses and individuals to comply with their taxation obligations. 1.3 The work which our members undertake in the field of VAT focuses primarily on ensuring VAT is accounted for and administered correctly. Our members routinely assist businesses in determining how much VAT is chargeable, how much may be reclaimed, what records to keep and preparing VAT returns. This submission is written with that background and governs which of the questions set out in the scope of the inquiry we will comment upon. 1.4 In Sections 2 to 5 below, we set out our comments on specific questions posed by the inquiry. In Section 6 we draw together our summary conclusions. 2 What aspects of VAT (either process or design) cause the biggest problems for businesses? How might they be improved? 2.1 Problems arise due to having three rates of VAT, categories of supplies which are exempt from tax and because VAT applies only to goods and services supplied in the course or furtherance of a business. The effect of these many variations is twofold. 2.2 Firstly, there is the obvious problem of deciding into which category a product falls. A good example was the lengthy dispute about whether a Jaffa cake was a cake or chocolate biscuit. Due to the multiplicity of rates and exceptions, similar conundrums exist today across many trade sectors. 2.3 The second problem is that reclaiming tax on costs is directly linked to making sales which are liable to 0%, 5% or 20% VAT. When a business makes sales at one or more of these rates and has income which is exempt from VAT, they are obliged to carry out quite complicated partial exemption calculations to determine how much VAT they may reclaim. 1 See Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number Authorised and regulated by the Financial Conduct Authority for consumer credit

2 2.4 Having fewer rates and exceptions would ease the burden on businesses and is a model implemented by New Zealand. By contrast, the UK VAT system has responded to political and social considerations with consequential complexities. The differences between the two countries were studied by the University of Exeter and the University of Waiko Management School. They reached the following conclusion 2 :..NZ was able to introduce successfully a very broad based tax, the situation in the UK was such that it was not possible to gain political support for the taxation of certain items such as food, children s clothes and domestic fuel and power. Even subsequent attempts have not been successful. For example, domestic fuel and power became subject to a rate of 8% in 1994 was reduced to 5% in 1997 and this rate has since been used frequently to favour a range of other areas for example, energy saving materials for home insulation from 2000, children s safety car seats and women s sanitary products from 2001, extending the coverage for energy saving materials in 2005, contraceptive products from 2006 and smoking cessation products from Although, of course, such changes have reduced the broadness of the tax, they have allowed VAT to be used to support a range of government policies 2.5 Using VAT to support government policies may be laudable but it creates difficulties for businesses and HMRC. This is especially the case because of the different ways in which state funded services are provided. 2.6 For example, state funded education and training is now a diverse a market place with services delivered by various organisations and businesses. The proliferation of different providers has created more VAT issues as there are often questions about whether the education or training is liable to VAT and/or how much VAT the provider may reclaim. As a result, it is not uncommon for these public service providers to pay advisers to negotiate with HMRC about how much of the public funding must be returned to the government coffers as VAT. 2.7 The health sector has also undergone significant changes in the past few years, and the VAT regime has not adapted quickly enough to deal with these. The use of various models for sub-contracted NHS and local authority care have greatly increased but there has been little clarity on how these new entities are to be treated for VAT purposes, tribunal case decisions are not always helpful, and unexpected VAT liabilities are a disincentive to private sector involvement. The sub-contacting of work by local authorities to charities in this sector can also lead to unforeseen VAT costs. The increasing use of artificial intelligence in diagnosis and prescriptions may require a revision of the definition of the health professionals exemption for VAT. The VAT status of cosmetic surgery is also causing concerns; this is a fast-growing sector, as society as a whole becomes more interested in and accepting of cosmetic treatments, and the present approach leads to uncertainty and confusion. 2.8 Each time a government creates a new exception from VAT or a category to which a different rate applies, it creates issues. There are always products or services which do not clearly fit into one category or another. Businesses are then expected to decide into which category the product or service falls and consider how this may affect how much VAT may be reclaimed. 2 Successful Tax Reform: The Experience of Value Added Tax in the United Kingdom and Goods and Services Tax in New Zealand by Simon James (University of Exeter) and Clinton Alley(University of Waikato Management School) 2

3 2.9 For example, one of the UK s foremost cathedrals is undertaking a multi-million pound refurbishment and building project and an ATT member is assisting the cathedral with the VAT issues. On behalf of the member and cathedral we asked for a meeting with HMRC to discuss these issues. The request was declined with HMRC telling us as follows: HMRC aims to provide guidance which enables customers to get their tax right without needing to contact us directly...recovery of VAT incurred in relation to cathedral building works is an area that could involve some complexity. Assuming the relevant criteria are met, we think that initial contact in this situation is best done in writing through the non-statutory clearance process In its reply HMRC suggested if the criteria are right using the non-statutory clearance process. However, if when they receive the written application for a clearance HMRC decide the criteria are not met they will not proffer an opinion on the questions asked. For this reason, the non-statutory clearance process is little used by ATT members. They find it unsatisfactory because HMRC often refuse to provide meaningful help. The reason behind this is explained by the Office of Tax Simplification (OTS) 3 as follows: there is a definite policy not to provide a clearance where the request is in essence simply seeking confirmation of the business s view of the correct VAT treatment..having HMRC confirm that the trader has the correct treatment would be helpful and offer reassurance. As one person put it, it doesn t take long for HMRC to say: yes, you re right 2.11 Our experience is that little has changed with the clearance system since the OTS made these observations. Businesses applying for a clearance still take the risk that the work in preparing their application will be wasted as the application will be refused rather than answered. From our dealings with HMRC we are aware the refusal rate is high Another example of how the help which HMRC is prepared to provide to businesses fails to give reassurance or certainty concerns the sale of business as a going concern. These are more commonly referred to as transfer of going concerns (TOGCs) and there are some mandatory regulations to be complied with Each transfer of a going concern is different. This is acknowledged by HMRC who say It is important that each transfer is considered individually for TOGC on the basis of its facts and circumstances so a one size fits all approach is not appropriate HMRC s very helpful guidance about what is or is not a TOGC for VAT purposes runs to about 25 pages. It takes the reader through the necessary conditions which must be met and how to decide if there is or is not the transfer of a going concern. Applying this to an individual sale is not always easy and something that even experienced tax specialists may struggle with. It is not surprising or unreasonable that taxpayers and/or advisers would like to agree matters with HMRC before the sale takes place. However, this option is closed to them due to HMRC s policy of not providing a clearance when HMRC does not think that there are genuine points of uncertainty. 5 3 Review of the competitiveness of the UK Tax administration: final report (October 2014) 4 VAT Notice 700/9, paragraph Guidance on the non-statutory clearance service offered by HMRC for all customers and their advisers. 3

4 2.15 Here again our members tell us they do not use the clearance system because commonly their application is rejected. HMRC confirm this. They inform us that in connection with TOGCs they have been rejecting 3 out of 4 clearance applications The lack of opportunity to agree matters with HMRC creates uncertainty. Businesses are often left wondering if they have done things correctly. Further, and especially with transfers of going concerns, it is possible to imagine a scenario where an application for a clearance is rejected but soon after the deal is done one party to the sale is visited by an HMRC officer whose view of the deal is that it was not the transfer of a going concern and considers there is therefore tax owing to HMRC All these problems and uncertainties arise because of complexities with the tax. Many complexities could be reduced by having fewer rates and exceptions. However, these are political decisions and Parliament may prefer to continue using VAT as tool to influence social policies The uncertainties and problems encountered by businesses could be improved if HMRC were more willing to engage with and assist businesses in a more constructive way. There would be immediate benefits if HMRC changed their policy on clearances and when asked were willing to say yes, you re right There is more assistance for agents with other self-assessment taxes. VAT is the only selfassessment tax without a dedicated telephone helpline for agents. If this were rectified by HMRC introducing a similar dedicated helpline, VAT agents would be able to check more matters with HMRC which in turn should reduce errors. 3 Will Making Tax Digital be sufficient on its own to reduce errors and significantly improve the collection of VAT? What other action would help businesses to get their VAT returns right? 3.1 It is difficult to know if Making Tax Digital (MTD) will reduce errors without knowing more about the common mistakes encountered by HMRC. For example, ordinary businesses will continue to make simple errors such as entering a standard rated sale as a zero rated one in their records. MTD systems will not stop this or automatically put it right. 3.2 The complexities alluded to above are another cause of errors. The errors in this category are usually because of the need to know how VAT applies to a particular sale or how much VAT may be claimed. This usually involves a logical thought process and is not something which we expect to find incorporated into a digital record keeping system. Thus it is difficult to conceive how MTD will reduce the errors arising as result of a wrong decision about the liability of a product. 3.3 In a recent survey about VAT we asked if MTD was a further reason for small businesses to want to remain below the VAT threshold. 74% of our survey said yes it would be. The perception is that MTD may result in more businesses trading just below the VAT although HMRC believe this may be short term, until MTD is embedded. 6 6 VAT registration threshold: call for evidence (March 2018) 4

5 3.4 In summary, and without more information about the reasons why 3.5 billion VAT was lost in , it is difficult to understand how MTD will reduce the error rate. Digital record keeping will not stop busy persons making simple errors or wrongly applying VAT to complex transactions. 4 Can disagreement between HMRC and a business about how much VAT is due be resolved quickly and fairly? If not, what are the obstacles and how might they be overcome? 4.1 With some disagreements, there is no possibility of compromise and the outcome must be a straight binary choice between HMRC s view and the taxpayer s opinion. For example, it was not possible to compromise when deciding if a Jaffa cake was a cake or chocolate biscuit, and due to the nature of the tax, disagreements about the categorisation of a products are common. Disputes like this often take a long time to resolve because both parties want a binding legal judgement. 4.2 Where there is room for compromise or it is permissible to make changes to how the business calculates its VAT liability, matters can be resolved more speedily. 4.3 In some areas it is arguable that doing everything in writing has slowed the process and outcomes would be speedier if HMRC were more ready to undertake face to face negotiations. 4.4 Small businesses are now less likely to appeal to the Tax Tribunals. Changes have made the system more formal and appeals more costly for small businesses. 4.5 Due to the increased costs of formal appeals, HMRC s Alternative Dispute Resolution (ADR) process is more important for and useful to small businesses. It should be used more to resolve VAT disputes. Although it will not be appropriate for categorisation disputes like deciding the status of Jaffa cakes, it can be extremely useful when there is room to compromise or it is necessary to agree the practicalities of quantifying how much VAT is due. 5 How does VAT measure up against the principle that tax policy should provide certainty without regular recourse to the courts which in turn requires legal clarity, simplicity and targeting (so that taxpayers are clear whether or not they are liable for particular types of charges to tax)? 5.1 Periods ending more than four years ago cannot be adjusted by HMRC except in cases of fraud etc. Consequently, taxpayers have the certainty of knowing that when four years have elapsed from the end of the period, the return which they filed cannot be adjusted. This certainty is provided for in the VAT Act Taxpayers may also gain certainty for specific transactions by obtaining a formal clearance from HMRC. However, as explained previously in this response, HMRC appear reluctant to give such clearances. 5.3 To return to our example of the sale of a business as a going concern, there are only two ways in which the parties concerned achieve certainty. They either wait for the prerequisite four years to elapse, or around the time of the sale they try to agree with HMRC that they are dealing with VAT liabilities correctly. Most, and especially those who are retiring, would like to reach an agreement 5

6 with HMRC so that they can move forward with certainty. This option is not available as long as HMRC continue to regularly and routinely reject clearance applications. 5.4 In summary, small businesses would benefit from HMRC giving more clearances and providing more positive assistance to businesses who contact them for reassurance that HMRC guidance has been understood correctly. This latter group do not understand why, when they are correct, HMRC do not simply respond along the lines of yes, you re right. 5.5 Of course the quid pro is that small businesses must not omit any relevant information when asking HMRC for assistance. 6 Summary and conclusions 6.1 VAT complexities can often be traced back to governments using the tax system to support social policies or the ways in which publicly funded services are delivered. 6.2 The opportunities for businesses to obtain binding clearances from HMRC are very limited and this results in uncertainty. 6.3 Businesses could be provided with more certainty by a readiness from HMRC to say yes, you re right when they receive an enquiry which sets out the full facts and reaches the correct VAT outcome. 6.4 HMRC provide a lesser service for VAT than other self-assessment taxes because VAT does not have a dedicated agent s helpline. 6.5 It is not possible to conclude that MTD will reduce VAT errors without better information about the common errors found by HMRC. Also, our evidence is that MTD is another reason for businesses not wanting to register for VAT. 6.6 Small businesses are now less likely to appeal to the Tax Tribunals because of the increased formalities and costs. This can be overcome to some extent by increased access to ADR. 6.7 For VAT registered persons, certainty comes after the four years from the end of the VAT period. The other means of getting certainty is to agree matters with HMRC but HMRC s policy is to restrict this to a very limited range of circumstances. 6.8 We would be pleased to join in any discussion relating to this call for evidence. Should you wish to discuss any aspect of this response, please contact our relevant Technical Officer, Emma Rawson, on or at erawson@att.org.uk The Association of Taxation Technicians 6

7 7 Note 7.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 8,500 members and Fellows together with over 5,700 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. 7

REVIEW OF VALUE ADDED TAX

REVIEW OF VALUE ADDED TAX Response by the Association of Taxation Technicians 1 INTRODUCTION 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the discussion