For and Against : Time for a clean sheet on VAT.

1973 was the year of the world’s worst oil crisis. It also saw the introduction of the ‘simple’ value added tax.

Value added tax is intended to reduce the risk of fraud, is borne mainly by the end consumer, and was designed to create clarity and certainty for businesses operating in the European Union.

Thirty years on, VAT is anything but simple or harmonised. In fact, it is one of the most complex taxes there is.

In addition there is a bias in favour of the customs authorities. In some European countries fiscal authorities actively seek to dissuade businesses from seeking legal redress in recovering VAT or its equivalents. The same can also be said in the area of intra-EU leasing transactions.

Many will say that it is outrageous for informal pressure to be exerted on businesses in some EU member states in this way.

However, I am not sure this is too far removed from our experience in the UK. It is rare to be able to correspond with a local VAT office on, for example, a partial exemption issue in relation to property and to receive a clear and correct answer.

In any event, the answers given are skewed in favour of a requirement to pay extra VAT more often than should be the case.

In fact, Customs & Excise, with the concept of ‘unjust enrichment’, has taken the art of blocking VAT recovery a step too far. This is applied where it is accepted that businesses had wrongly been told to charge and pay VAT to Customs & Excise on particular items.

Reimbursement should not occur, argues Customs & Excise, because it would be impossible to track down and repay customers who paid VAT on their goods or services unnecessarily.

Somewhere along the way we seem to have lost the plot.

The tax stopped being simple and the rate more than doubled against the 8% rate that once existed. If we started all over again with a clean sheet, would we end up with a VAT system or a sales tax system?

The time has come for the UK to take the debate to Europe and either drastically reform the VAT system or replace it with something which works simply and transparently.

  • Chas-Roy Chowdhury is head of taxation at ACCA.

Related reading