Businesses find VAT rules too complex

Two thirds of companies complain that VAT compliance is complex and confusing as we mark the 50th anniversary of the introduction of the tax

The majority (71%) of VAT-registered businesses believe that business taxes, including VAT returns, are complex and confusing, while only half (51%) of businesses are confident in their ability to explain some elements about their VAT obligations, finds research by VAT consultancy Avalara.

It is also hugely complicated with different rates for foods, apparently with little justification.

VAT is one of the top sources of government revenue, raising over £143bn in 2021/22. Introduced on 1 April 1973, the tax was set at 10% in its first year and brought in £1.5bn, equivalent to £16.7bn in today’s prices.

The tax that originated on April Fools’ day in 1973 marks 50 years since it was dubbed ‘a simple tax’ by then Chancellor Anthony Barber.

The Association of Taxation Technicians (ATT) is calling for reform of the ‘baffling’ VAT food and drink rules which see milkshake powers taxed differently according to their flavour. This means chocolate-flavoured powder attracts zero VAT while strawberry or banana are subject to the standard rate of 20%.

In addition, a gingerbread man with chocolate trousers attracts 20% VAT, while it is zero rated if only his eyes are made from chocolate.

Alex Baulf, senior director of global indirect tax at Avalara, said: ‘From jaffa cakes to Cornish pasties, VAT has been stumping businesses for five decades. However, it really can be a simple tax, as the Chancellor of the Exchequer in 1973 intended it to be.

‘Complexity in calculating the right rate of VAT at the point of sale, and then preparing a VAT return are two of the main pain points businesses face, leading to increased stress, time and effort, and ultimately risk of making errors.’

The research found that 46% of businesses spend anywhere between 10 to 40 hours per month managing VAT compliance, including checking transactions, doing VAT returns, and researching different tax laws.

Notably, medium-sized businesses spent the most time on VAT compliance with 72% spending six to 20 hours per month managing VAT.

Nearly a quarter (24%) have been audited for filing their VAT return inaccurately or late, and 20% have accidentally overpaid on their VAT return.

Under Making Tax Digital (MTD), all businesses have to comply with digital record requirements. As a result, approximately 832,000 registered businesses are at risk of penalties.

High fines due to non-compliance are a burden businesses cannot afford to take on in the current economic climate, warned Baulf.

The majority of decision makers (93%) said they were in favour of a movement to simplify the rules around VAT for their businesses.

Other confusing examples within the VAT system include savoury popcorn being standard rated unless it is microwave corn ‘sold for popping’, which is zero-rated, ATT said.

Senga Prior, chair of ATT’s technical steering group, said: ‘Our VAT rules on food and drink are well past their ‘best before’ date. As the tax celebrates half a century, now is the time for the government to take a closer look at the complicated and often baffling rules which govern how VAT is charged on food and drink.

‘Simplifying and rationalising these rules would reduce confusion, as well as save HMRC and taxpayers the time and costs often associated with arguments over VAT treatment. Bringing more food and drink items into the zero rates or a reduced rate could also provide a financial benefit to the hospitality sector and those struggling with the rising cost of feeding their families.’

Censuswide conducted the Avalara research and surveyed 1,014 business decision-makers.

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