Lord Justice Sedley once famously observed;
“Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”
VAT may be a money-spinner for the UK government, but some of its effects are definitely perverse and seem to run counter to established policy in other areas. That may be because, to a person most familiar with direct taxes, VAT as an indirect tax seems fundamentally unnatural. In a nutshell, for a business within the scope of VAT, it’s good to be taxable but bad to be exempt. We take a look at these effects later. But first, is there a new lease of life for this middle-aged tax?
A new lease of life for VAT?
They say life begins at 40, and as VAT celebrates its fortieth birthday, we wonder whether there could be a new lease of life for this much-criticised tax. Originally introduced as a flat rate ‘simple tax’, forty years on, VAT is anything but simple. Back then, the VAT rate was 10 percent and legislation ran to 50 pages, whereas now it’s 20 percent and extends to over 1,050 pages (not including EU VAT legislation).
Over the last four decades HMRC has collected more than GBP 1.6 trillion in VAT, with this year’s VAT yield estimated to top GBP 103 billion. This is on par with national insurance and second only to income tax as a generator of tax revenues (corporation tax yields only GBP 39 billion).
Despite VAT being recognised as one of the largest throughputs in business, many organisations fail to identify opportunities and risks in their VAT accounting for both in-territory and cross-border transactions.