Charity representatives have expressed concern after the the Office for Tax Simplification (OTS) recommended a comprehensive review of VAT zero-rates.
OTS, an independent office of the Treasury set up in July 2010, has announced details of its first review of VAT, due to be published in full on 7 November. This includes a recommendation for HM Treasury and HM Revenue & Customs to “undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules”.
It says the full report will consider potential changes to the £85,000 registration threshold, of which it says the UK’s is “one of the highest levels in the world”.
OTS says allowing smaller organisations to stay out of the VAT system costs around £2bn per annum in unclaimed VAT, compared to the EU’s £10,000 minimum level, and says that some businesses are discouraged from expanding because of it.
'Sounds like bad news'
Charity Tax Group (CTG) chair John Hemming said the review of reduced rate and zero-rates “sounds like bad news”.
“It is unlikely that they are going to expand reduced rates and zero-rates,” he said.
With regards to exemption schedules, he said that CTG had been lobbying for charities to be able to opt to be taxable on some exempt supplies that would mean they effectively pay less VAT.
Meanwhile, Andrew O'Brien, director of policy and engagement at Charity Finance Group, said the announcement presented “both opportunities and risks” for charities.
“We agree with the OTS that VAT is showing its age and certainly, for charities, it has not kept up with changes in how we operate. We need to go back to the drawing board, looking at the principles behind VAT and make sure that we have a system which reduces the burden as far as possible so that more money goes on delivering charitable activities.
“Reviewing the exemptions and zero ratings would be a helpful start to achieving this, but we need to work together to get the right message across otherwise there is a danger that we could lose these important tax reliefs. In the run up to Brexit this review is particularly timely and we will be working with charities across the sector to get the best possible outcome."
The OTS report will also consider the partial exemption regime, the capital goods scheme, the option to tax and other special schemes.
Angela Knight, chair of the OTS board, said: “This report presents an opportunity to start addressing the many anomalies of VAT. The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced.
“For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”
Paul Morton, OTS tax director, said: “This report will flag up the effects of the registration threshold, how entry into the VAT system might be smoothed and many other areas where simplification would be beneficial, particularly the complex and often subjective boundaries between those supplies which are standard rated and those which fall within the reduced or zero-rates or which are exempt.
“In addition, there will be opportunities to build on the good work of the last few years in improving the administrative aspects of the running of the VAT system.”