Having spent all my career in the wonderful VAT world since its introduction in 1973 I just thought I would share a few personal observations faced with Brexit. A wise man once said if you can understand the past you can prepare for and shape the future. So this is a very short abbreviated history of VAT followed by my view of possible changes post Brexit.

In May 1973, flushed with success after passing the Civil Service examination, I was appointed as an officer of HM Customs & Excise. Thinking I was going to be given a smart uniform and run around in a fast car chasing smugglers it was a shock to find on my first day that I would be working in an office dealing with a new tax called Value Added Tax. My only awareness of VAT was that it was a European tax which the UK had to impose because after 10 years of struggling to be admitted the UK had joined the Common Market

In the early years of VAT there was not too much of a European influence apart from some general guidelines particularly in the area of exemptions such as finance, property rents and insurance. The  UK had negotiated a transitional arrangement during which certain items could benefit from being zero rated e.g. food, transport, books. This arrangement was only supposed to last until 1978. The UK had exempted very small businesses from VAT by agreeing a high registration threshold under which businesses did not have to register. This was £5,000 in 1973!!

The first step towards harmonisation took place in 1978. In the tea room at the VAT office the talk was all about the “Sixth Directive” which was  to my mind a vaguely sinister term like something from a Russian spy novel. The directive harmonised VAT across the member states of what was by this time called the European Economic Community. The UK had to agree to minimum and maximum VAT rates. Prior to 1978 the VAT rate in the UK had been 10% reducing to 8% with a higher rate applying to luxury items e.g. washing machines! In 1979 the VAT rate was raised to 15%, the minimum allowed.

Even after 1978, goods moving to and from other member states were treated as exports and imports. Although Customs Duty did not apply the VAT consequences of purchasing goods from France was exactly the same as purchasing goods from Australia. This meant on imports, no VAT being charged by the supplier but import VAT being imposed by HM Customs & Excise. Until 1984 there was a system called postponed accounting which reduced the cash flow burden for importers. Rather than having to pay VAT to clear the goods the import VAT due and the VAT recoverable could simply be declared on VAT returns. This of course had a negative cash flow effect on the authorities which is why the system was abolished.

It was not until 1992 that the VAT free movement of goods was introduced and using the destination principle businesses importing from the European Union (as it was now called) obtained a cash flow advantage as acquisition tax and VAT input recovery were declared on the same VAT return (a hark back to postponed accounting).

After the Sixth Directive was introduced, UK law had to comply with European law. In the event of a dispute, taxpayers could rely on the Sixth Directive. From the mid 1980s the influence of the European Court of Justice increased and all member states had to comply with rulings. If a country wishes to introduce rules which do not comply or are unusual it has to obtain a derogation.

Where a country does not comply with directives, the European Commission can take proceedings against the country concerned. The most famous or infamous occasion was when the UK was forced by the European Commission to give up its zero rating of new commercial buildings. Prior to 1989, all the grant of a major interest (freehold or lease in excess of 21 years or 20 years in Scotland) in both residential and commercial buildings was zero rated. The UK had to apply the standard rate to grants of freehold in commercial buildings with leases being exempt (with subsequent loss of input tax). This lead to the option to tax facility and increased the complexity of VAT considerably. Other areas where the UK has been forced to change its stance have been:

·         Exemption being applied to non profit making sports clubs;

·         VAT being imposed on domestic fuel and power.

 

So what can we learn from history faced with Brexit. It is unlikely that VAT will be abolished but the UK could return to the pre 1978 world.

The UK would be free to set its own rates and not be constrained by the European Commission rules. This could extend to zero rating being reintroduced on domestic fuel and power. The standard rate of VAT could be reduced below the EU minimum of 15% if considered economically desirable (it could also be raised higher than the EU maximum of 25%).

Exemptions such as the subscriptions to non profit making sports clubs, finance and insurance would not have to be complied strictly in accordance with EU rules.

We would certainly return to the pre 1992 rules regarding imports and exports. The government could reintroduce the postponed accounting system (see above) at least for a period of time in order to ease the cash flow burden for businesses regularly importing goods from the EU.

VAT  could be made simpler for small businesses. The European Commission refused to sanction more than £150K as the threshold for the flat rate scheme. The UK has to apply for derogations to increase the threshold for the cash accounting scheme and annual accounting scheme. Derogations will no longer be required post Brexit.

Finally it may be possible to change or even abolish the hated and complex option to tax system for properties by reintroducing the zero rate to grants of major interests in all new buildings.

Of course the tax take (VAT accounts for 22% of tax revenues) will have to be maintained so the world post Brexit will not all be about VAT reductions. My hope though is that some of the red tape which is mostly as a result of EU rules can be abolished and VAT can be made simpler for businesses who are really unpaid tax collectors.

Tim Buss presents courses on VAT for Accounts Payable, VAT for Accounts Receivable looking at input and output tax issues respectively and VAT on expenses for Quorum Training. He will be presenting courses on VAT: post Brexit next year.

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Tim has been involved with VAT since 1973. He joined HM Customs & Excise (“Customs”) in May 1973, shortly after the introduction of VAT in the UK. He worked as a visiting VAT inspector and as a classroom trainer. Tim left Customs in 1989 and joined accountants PKF as a VAT Consultant responsible for all aspects of VAT. He was appointed director of VAT in 1998. In October 2005, Tim left PKF to set up his own VAT consultancy and training company. In addition to presenting various training courses Tim is a consultant to a number of accountancy firms and other businesses. He has represented clients in a number of VAT Tribunal cases. These include: Croydon Hotel & Leisure Co concerning the right to deduct VAT where a supplier has not accounted for output tax. SEH Holdings Ltd which related to the disapplication of an option to tax on a public house sale and forced HMRC to change its policy. Tim has succeeded in sustaining arguments on behalf of clients with HMRC including several issues regarding the evidence to support input tax deduction and evidence of movement of goods from the UK. Tim regularly writes and lectures on a range of VAT topics. In 2005 he wrote a book on VAT and Property Transactions. He was a Council member and for three years was director of education of the Institute of Indirect Taxation. He was responsible for the entrance examination. Tim is currently an associate member of the Chartered Institute of Taxation following a merger of the two institutes.

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