It’s the tax that has been causing sleepless nights for finance teams for half a century.
VAT turned 50 in April 2023.
The anniversary won’t have been celebrated in too many accounts departments, as the tax has been the cause of plenty of headaches over the decades. However, the right software can make the burden of VAT returns significantly lighter.
A short history of VAT
VAT has been a fact of life for finance teams since April 1973, when it was ushered in by the UK’s membership of the European Economic Community. It replaced the Purchase Tax, which had been around since 1940 and was levied at a variety of rates.
At the time of its introduction by Conservative chancellor Anthony Barber, VAT was set at 10%, but chancellors have frequently moved the rates up and down since then:
- Labour chancellor Denis Healey reduced the basic rate of VAT to 8% but with a 12.5% rate for petrol and some luxury goods. Healey raised the higher rate to 25% in 1974 but cut it again to 12.5% in 1976.
- After Margaret Thatcher’s election victory in 1979, chancellor Geoffrey Howe nearly doubled basic VAT from 8% to 15% but abolished the higher rate.
- Conservative chancellor Norman Lamont raised VAT to 17.5% in 1991.
- VAT was reduced to 15% by Labour chancellor Alistair Darling in the wake of the 2008 crash, but rose again to 17.5% in 2010.
- George Osborne, chancellor for a Conservative-led coalition government, raised VAT to 20% from 2011.
- The default rate of VAT remains 20%, with some items, such as domestic fuel, taxed at 5%, and a zero rate for children’s clothes and most food.
From pasties to Jaffa Cakes: VAT controversies and anomalies
Some of the brightest minds in the civil service, the law and the accountancy industry have wrestled with the question of whether a Jaffa Cake is really a cake or a biscuit. Or whether a hot pasty is a different kind of meal than a cold one. These are among the many VAT controversies that have plagued business over the years:
- In what was dubbed the “omnishambles” budget of 2012, George Osborne proposed to levy 20% VAT on pasties, rotisserie chickens and other hot food sold in bakeries and supermarkets. He was persuaded to drop the idea two months later.
- Chancellor Norman Lamont raised VAT on domestic fuel from zero to 8% in 1994 but plans to increase it further to 17.5% the next year were defeated in Parliament. Chancellor Gordon Brown reduced the tax on fuel to 5% in 1997.
- VAT on sanitary products has long been controversial. Gordon Brown cut the rate from 17.5% to 5% in 2001 and the rate was cut to zero by chancellor Rishi Sunak amid public pressure in 2021.
- Chocolate biscuits are subject to VAT at 20% but standard biscuits are zero-rated. HMRC has settled the question of which category of treat Jaffa Cakes belong to. For tax purposes, they are classed as cakes and therefore escape VAT.
Common VAT problems (and how software can help)
VAT is a reality for any business with a taxable turnover above £85,000.
The responsibility to file accurate returns, under threat of a hefty fine, can lead to a situation where some of the most senior people in a finance team spend chunks of their time examining receipts for staff’s Tesco sandwiches.
Fortunately, software can take on some of the trickiest work.
Staff eligible to claim expenses for purchases such as lunches and petrol have traditionally filled out forms monthly or weekly and returned them to the accounts department with receipts stapled to them.
That leaves the finance team going through receipts line by line to check totals and VAT figures – not the ideal use of anyone’s time.
While these tasks still have to be done, the right software allows employees to photograph receipts with their phones and submit their claims while on the road. Claims can then be checked promptly and authorised electronically.
Changes of rates:
Fluctuating VAT rates are one thing, but when the system is overhauled to introduce new bands of VAT, the upheaval can be more than older software can handle.
With an on-premise finance platform, it’s possible that someone from the vendor will have to turn up and upgrade the system for the whole organisation.
VAT-registered businesses can tot up the value of any tax paid on their purchases and take that figure off their total VAT bill. Charities, since they don’t pay VAT, cannot do the same.
That’s the principle, but things become more complex in the case of charities that carry out some commercial activities. They may be liable for partial VAT, enabling them to claim back an agreed percentage.
With the right software, the issue can be handled when the data is entered, leaving the system to calculate the amount due.
If your business trades overseas, then it may be liable for VAT in the country where it supplies those goods or services. The more countries you trade in, the more complicated the situation can become.
A comprehensive finance system will enable you to easily handle overseas VAT and GST (goods and services tax), making sure you are compliant abroad as well as in the UK.
Filing VAT for a group:
Businesses that consist of several related companies may be required to submit VAT returns for each entity or a single consolidated group return.
There are advantages to the group approach, but for many businesses it means putting figures from each company into a spreadsheet before working out totals for submission. Software can automate that task, cutting out work, saving time and reducing the room for error. It will also keep the system compliant with Making Tax Digital standards and automatically post group VAT adjustments between companies.
Taking up senior staff’s time:
For many finance departments, VAT is one of those tasks that is hard for the boss to delegate, because the finance director or chief financial officer carries the can if mistakes are made.
Software which handles these processes, including authorisation workflows and controls, can help, with other members of the team able to do many of the tasks and submit them to the FD for oversight and submission.
Fear of inspection:
The prospect of a VAT inspection is not something an organisation relishes. It can involve your records being closely reviewed, with an inspector poised to ask you for all invoices relevant to your VAT return. But the right software allows those invoices to be kept electronically with the record of each transaction. At the same time, it helps the organisation comply with Making Tax Digital and produces the necessary evidence of electronic record keeping.
What’s more, having modern software can demonstrate that sound systems, checks and controls are in place for handling VAT correctly and compliantly.
That should make inspection less of a burden – as well as making it easier to defend your position if any human errors have crept in.
Half a century after VAT was born, software can help to a degree that would have been unimaginable to the finance teams who first tackled the tax with no more computing power than that of their desktop adding machines.
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