The BCC reports that the vast majority of UK businesses believe the cost of complying with the UK tax system has escalated over recent years.
Their survey found more than 75% of 1,100 businesses surveyed believe the overall burden of tax administration and compliance – the HMRC equivalent of red tape – has increased compared to five years ago.
Rob Marchant, Crowe’s VAT partner, explains why VAT is a complex area.
Businesses understand that tax compliance is a necessary cost.
VAT is a self-assessed tax, and the taxpayer acts as a collector for HMRC, so it is no surprise that VAT is identified by 64% of respondents as the tax that creates the biggest administrative burden.
The UK VAT regime, which is based on an EU VAT directive (so this is not just a UK issue), requires many businesses to prepare and submit VAT returns every three months, but VAT compliance is not a quarterly activity.
VAT is a transactional tax, so every sale or purchase potentially has a VAT impact. The amount of VAT under management can therefore be as much as 40% of a business’ turnover, so even a small error rate can lead to a sizeable VAT cost.
A continual challenge for business is that the VAT laws they are complying with were written more than 40 years ago, so don’t necessarily reflect modern technologies and business models.
It can be complicated for businesses to understand how new products will be taxed, in which country, and to ensure this is factored into pricing decisions.
For example, why is a hardcopy book subject to a zero VAT rate, but the same book purchased digitally is subject to standard-rated VAT? In VAT law, the two transactions are very different, hence the differing VAT treatments.
Businesses trading internationally need to be aware of potentially inconsistent VAT developments in more than one country.
In the UK, HMRC has ambitious plans to become the world’s leading digital tax authority, and VAT is at the forefront of the changes that come into effect in April 2019. HMRC is not providing software to businesses, choosing to work with commercial providers who will develop and bring to market software solutions.
HMRC estimates the cost to the 1.2 million businesses that will have to meet the new rules will be £131 million, which works out at £109 per business. This figure seems to be on the optimistic side, and also doesn’t appear to include the not insignificant time needed for revised VAT compliance processes to be introduced.
Jane Mackay, Crowe’s Head of Tax, argues that technology often makes thing harder, rather than easier, for businesses.
For several years, technology has been streamlining tax filing obligations; this should have saved time.
However, poorly integrated IT systems and different filing requirements for different taxes mean businesses are still spending significant time manually inputting and checking data, before submission.
Businesses know that investment in technology will drive efficiencies over time, but investment in new systems is costly, with a return on that investment uncertain because so much of the tax environment is changing.
UK tax legislation is now three times the length it was 20 years ago, so it is no wonder that many businesses believe their compliance burdens have increased, specifically in the past five years.
Many businesses can struggle to work out how the tax rules apply to them and fail to claim all the tax reliefs that are available.
The recent Finance Bill introduced a points-based system to penalise compliance failures and an increased risk of HMRC scrutiny and penalties may result in businesses spending even more time getting their tax filings right and submitted on time.
For large companies, additional tax-related reports, such as the requirement to publish a tax strategy, country by country reporting, and specific returns under the new corporate interest restriction rules, mean that whole in-house tax departments are occupied with keeping on top of new tax filing obligations and making sure their finance and governance systems can produce the right information.
The progress of Brexit in the House of Commons has been headline news for much of July and companies are advised to plan for the possibility of a no-deal Brexit.
This could add to the compliance burden, if companies have to get to grips with bilateral tax agreements with a range of different trading partners in place of EU wide directives, such as the royalties and interest directive.