ACCA says although VAT was supposed to be a simple tax when introduced on 1 April 1973, it has become so complicated that 56 per cent of small businesses say it is an obstacle to their business success, according to figures from the Department of Business, Innovation and Skills.
Chas Roy-Chowdhury, ACCA head of taxation, said: 'VAT was supposed to be a simple tax, harmonised across Europe, when it arrived back in 1973. Today, some VAT rates are double what they were back then, we have a non-harmonised system at European Union level and VAT treatments today fall into five different categories, which make it far from simple. VAT has clearly become an obstacle for businesses looking to grow. Making it less complicated seems like an obvious solution but it is an essential one if we want the UK’s SME and sole trader sectors to develop without the tax system holding it back.
'Over the last 40 years we have seen VAT throw up the most bizarre debates over what falls into the VAT net, including the Jaffa Cake conundrum that ended up in court and saw McVities go to great lengths to prove the Jaffa Cake was not a biscuit for VAT purposes. Looking ahead, eBooks provide us with a new dilemma. Having established that eBooks share more in common with standard-rated services than they do the protected zero-rated class of printed books, we now have the whole issue of where you actually charge the VAT on eBooks – with particular focus on the tendency of some suppliers to charge UK VAT to the publisher (20 per cent) but only pay over Luxembourg VAT (3.5 per cent) to the authorities.
'Making VAT easier for businesses would also help the enforcement authorities as well. Businesses get VAT wrong and payment systems that split the VAT off at the point of sale, sending it direct to the Treasury with merchants only keeping the net receipt would make life easier for everyone – business and tax collectors alike. However, this would exclude cash dealings and we are not quite at the point where cash sales are dead and everything is paid for electronically. Even here the development of phantomware in payment systems could allow businesses to manipulate how much tax they pay. Recent HMRC figures show that almost 70 per cent of visits by trained investigators found such sales manipulation software, so any future VAT system would need to be robust.'
ACCA points out businesses are faced with five VAT categories of Standard Rated, Zero Rated, Reduced Rated, Exempt or outside the scope of VAT – with more complex issues relating to areas such as restaurant discounts. The variation of how VAT is applied in different countries is also confusing with some countries outside Europe applying VAT across the board and then paying rebates to those on the lowest incomes.
Chas Roy-Chowdhury added: '40 years of VAT is not a cause for celebration. It is a reminder of the never-ending headache VAT creates for businesses.'