After fifty years of existence, VAT is still confusing business leaders. That is according to research commissioned by Avalara, the tax compliance technology company. Censuswide surveyed 1,014 business decision makers in UK businesses. They found that 71% of VAT-registered businesses find business taxes, including VAT, are complex and confusing.
Furthermore, 51% of business decision-makers would struggle to confidently explain their VAT obligations to someone outside the business. This highlights that there is still confusion and a lack of knowledge at the top of businesses.
New VAT rules, simplification, or not
The study found that 93% of UK business decision-makers would support a movement to simplify the rules around VAT. The survey, conducted in March, was after the government introduced a new penalty and interest charges scheme for new returns from January 1st 2023. The changes “aim to simplify and separate penalties and interest.”
The changes mean that companies owe interest at the Bank of England base rate plus 2.5% from the first day it is overdue. If the payment is more than 15 days late, a penalty of 2% on the amount owed is added to the sum. The amount is also doubled if the payment is over 30 days late. The penalty then increments daily after that, on top of the interest.
There is also a new penalty points scheme for late submissions, including nil payment returns. Every time a submission is late, it earns a point; when the points cross a threshold, there is an automatic £200 fine. The thresholds vary depending on the accounting period used. Penalty points are only removed after roughly two years of compliant returns.
The new “simplified” payment system appears less onerous than the previous scheme. However, that will be little comfort for those companies already struggling to make the payments. According to the survey, 24% of UK businesses have been audited for filing their VAT return either inaccurately and or late. 20% have accidentally overpaid on their VAT return. Better to err on the side of caution than risk the fines, perhaps. Without a qualitative element to the survey, it is unclear why organisations overpaid.
Is technology a solution
Organisations are clearly struggling with VAT. this is evidenced by 46% of the respondents spending between 10 and 40 hours every month checking their VAT. This includes looking at transactions, VAT returns and checking different tax laws.
Making Tax Digital meant that organisations must submit returns digitally after November 1st 2022. That was when HMRC shut down the legacy portal. Add to that simplification, and more than 832,000 UK VAT-registered businesses are at risk of hefty penalties.
Despite this, 29% of UK businesses are hesitant to invest in technology to support the calculation and preparation of VAT. Presumably, most rely on their accountants to do this through their software. Only 46% of UK businesses have invested in technology to support the filing of VAT returns. Similarly, only 43% use technology to support their business in preparing VAT returns.
It is, therefore, little surprise that 93% of business leaders favour a movement to simplify the rules around VAT for businesses.
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 Anthony Barber 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.
“However, by adopting technology, businesses can really streamline and automate VAT processes, reducing the risk of errors and penalties, and the headache associated with staying compliant.
“VAT shouldn’t be the tail that wags the dog. Businesses should have confidence in their VAT obligations, from invoice to return, so they can instead focus on the things that matter, like growth”.
Enterprise Times: What does this mean?
The results of this survey are, sadly, not that surprising. Avalara highlighted some stranger VAT tax blunders over the last fifty years. They included Pastygate in 2012 and the tax ruling over Jaffa cakes in 1991. Most recently, we’ve seen the long-running argument about VAT on tampons, which Rishi Sunak zero-rated as recently as 1 January 2021.
VAT isn’t simple. There are multiple VAT rates and confusion over what products may or may not be vateable. VAT rates vary even between the different nations in the UK, and rates of Exempt, 0%, 5% and 20% across a range of services and products.
Avalara’s tax compliance solutions help organisations with VAT in the UK, and the even more complex VAT and Sales tax rules in other countries for services and products. With the 50th anniversary of VAT on 1st April, it was important to publish these findings before April Fools day so organisations would take the information seriously.
Getting VAT right is important. The first stop is an accountant, but technology may be a better and cheaper way to resolve the challenge.