After an election, especially if the winning party has a large majority, there is often speculation that major changes to the tax system, including VAT, may be made.
But, while there is talk that certain personal taxes such as inheritance tax and capital gains tax may be addressed in the forthcoming budget, industry experts believe one tax the reformed Conservative Government will leave well alone is VAT. There are three main reasons for this:
Brexit
Leaving the EU will cause enough VAT challenges for businesses anyway without imposing major domestic changes too. So it is unlikely there will be any extension or reduction to the list of items that qualify for exemption or the zero rate.
One major difference after the UK’s departure is that VAT imported goods into the UK will be subject to the ‘postponed accounting’ system. Under this 1980s accounting rule, each UK importer had to have a UK VAT number but the importer did not pay import VAT when the goods arrived in the UK port or airport. Instead, the VAT was deferred.
The rule was abolished in 1984 and the proposed re-introduction has given rise to the fear that it will cause great confusion among business owners and open up the potential for fraud. Businesses which hold call-off stock in lots of different EU countries will need to obtain a UK VAT number in each country and to be equipped to deal with various overseas tax authorities.
Fears of a Repetition of the Pasty Saga
Another reason it is thought the Government will be reluctant to tamper with VAT is that they will want to avoid a repetition of ‘Pastygate’. This was when George Osborne attempted to simplify the tax treatment of “hot takeaway food” in 2012 so that VAT would be charged at 20% in all cases.
Traditionally, food bought to cook or eat at home was zero-rated for VAT and it was just meals that were consumed in a restaurant or hot take away food and drink that were charged at the standard 20% rate. The contentious middle ground lay with food that was freshly baked for sale and was sold hot while cooling down but that was not intended to be eaten hot. The proposals would have increased the sale price of hot snacks such as sausage rolls and Cornish pasties. A huge row broke out and the Government was forced to make a series of embarrassing U-turns, demonstrating that even a small change to the VAT system can be difficult to implement.
In fact, David Cameron mentioned the example in his recent autobiography, “For the Record”, saying “frankly, never touch VAT definitions. It’s not worth the trouble. Beware symbolism. 20p on a pasty can cost you more than £1,100 off income tax.”
Delayed Reverse Charge
There is also already a major VAT change underway in 2020 which makes it unlikely any other adjustment would be attempted. October will see the introduction of the reverse charge of VAT for the construction industry. It will mean that the customer will be liable to account for the VAT in purchases rather than the supplier. The move is designed to tackle fraud but the change has already been delayed by a year as the industry was not ready for the accounting and software challenges it presented.
