Posts Tagged ‘VAT’


Slow motion car crash

January 20, 2015

I’m sorry to keep banging on about the VAT thing.  It’s just… compulsive.  Like watching a slow motion car crash.  I genuinely don’t understand how we got to where we are, and how it is that the tax profession seems to be utterly complacent that everything is working as it should and that small businesses are whinging unnecessarily.

Look at this, for example, via writer and academic Juliet McKenna, pointing out a KPMG report on its research into readiness for the VAT place of supply changes, and its findings that more businesses are flailing than are ready.   I particularly draw your attention to its statement that “156 businesses responded including small-sized (less than £10m turnover)…”

In a world where a ten million pound turnover makes you “small”, what price the nano businesses where ten thousand pounds is a good year?

What we are talking about here is administrative burden.  “Administrative burden” is a technical term in impact assessment although it’s often simply referred to as “red tape”.  Essentially it’s the cost of complying with government regulation, and there’s a reasonably coherent principle behind it.  If you or I spend an hour filling in our tax returns it doesn’t cost us actual money; we spend our leisure time on that instead of on reading a book or watching Wolf Hall and we complain but we aren’t left worse off in financial terms.  If a business spends an hour filling in tax forms, however, it undergoes an actual cost, because there is one hour of staff time spent on administration that could otherwise have been spent on profit-generating activity.

However alongside that there is a much bigger proportionate cost to smaller businesses than to larger businesses.  If a business with a million pound turnover has to spend £1000 of staff time on filling in VAT returns it has lost 0.001 of its turnover.  If a one-woman kitchen-table nano-business has a turnover of £10,000, it has lost a tenth of its turnover – and there are viable part time “bonsai” businesses with turnover of £1000 or so, which form a useful supplement to family income, and which will of course be completely wiped out.

I don’t have an answer.  But I have some questions, first of which is – where is the tax profession?


Get Carter

November 11, 2013

One of the things I am becoming increasingly interested in academically, and which you may have noticed as a recurring theme in this blog, is the disjuncture between people-who-know-about-tax and everybody else.  The most useful terminology I have found for this so far is to use a simile taken from Harry Potter and call the two groups “tax wizards” and “tax muggles”, particularly as the Potter analogy allows for people like me, a “squib” who knows about the existence of the tax wizarding world but doesn’t lay claim to any of its powers.

Let us thank goodness, then, for the Low Incomes Tax Reform Group, a charitable offshoot of the Chartered Institute of Taxation, which aims to be, well, I suppose the Potter analogy would be the Ministry of Muggle Affairs – to

‘Target for help and information those least able in the community to afford to pay for advice and make a real difference to their understanding of the systems of taxation and related benefits whilst working to make them more equitable and accessible for their needs.’

They supported and won a test case, TC02910: L H Bishop Electric Company Limited and related appeals (I’m afraid I can’t find a link to this that isn’t on a paid website but here’s LITRG’s press release about it) about mandation of VAT reporting online.  In other words, some people can’t, won’t or at least find it very difficult to, conduct their VAT relationship with HMRC purely over the internet and wanted the same exemption that people with religious beliefs that prevent them using computers have.  (Incidentally, I had always rather lazily believed that this exemption was in place for the Plymouth Brethren but I see from their website that apparently they have been using computers for five years now… in which case, who DOES get the “religious” exemption?  Does anyone know?)

The argument was, essentially, that people who don’t use computers because they’re old – they didn’t learn at school and they have no particular desire or need to learn now, and they find it harder to take on board new information by reason of their age – and people who have a disability – either a cognitive disability that prevents them absorbing the information on a computer screen or a physical disability which prevents them using a screen or keyboard – ought to be exempt from having to file online.  In addition, people who live somewhere that doesn’t have a broadband service sufficient to get them onto the HMRC system, again, ought to be exempt.

The HMRC argument can be summarised as: “tough.”  Or, at least,

  • ask a friend or family member to do it for you on their computer
  • use a computer in a library
  • pay an agent
  • use a computer in an HMRC enquiry centre, or
  • use the Sekrit Phone A Friend service they invented just for this case (don’t ask)

The tribunal, it’s fair to say, wasn’t impressed.  Libraries are closing left right and centre.  HMRC enquiry centres are either closed or scheduled to close.  Asking or paying someone else to make a return has privacy implications.  And HMRC inventing a telephone filing method but then not telling anyone about it, well, this is what the tribunal had to say…

The current version of telephone filing, as offered to the joint appellants, requires the taxpayer to agree three months in advance with HMRC a day and time (in HMRC’s business hours) when HMRC will ring the taxpayer in order for the taxpayer orally to state the figures on the VAT return…

HMRC does not accept that telephone filing is inconvenient. They point out that the HMRC agent would ring back if the taxpayer was engaged. But the protocol established by HMRC for telephone filing is that the agent will only ring back twice, and will then write a letter to the taxpayer in an attempt to re-arrange the phone call.
I find reliance on the postal service to re-arrange a phone call is unrealistic: VAT returns are due on set days. Unless the taxpayer arranges the first call to be on a date long before the due date, he would run the risk that if the call has to be re- arranged, the new date will be after the due date.
HMRC do not suggest that the arrangements for the re-arranged call can be made over the phone. It is not part of the protocol, and as evidence above has shown it is very difficult to contact HMRC by phone.
I find telephone filing is not a very convenient option for submitting a time sensitive document, the late submission of which will incur penalties.
and then (and this is my personal favourite part of the judgement)

496. Its concessionary status was not the only controversy over telephone filing. There are (at least) three reasons why it might be unlawful:

  • It may ignore s 25(4) Value Added Tax Regulations 1994;
  • It is an unpublished and largely secret concession;
  • It may be “Wednesbury unreasonable” in that HMRC do not appear to have considered all relevant matters
Unfortunately, though, the judgement isn’t going to be much use to most people, since (as far as I understand the rather detailed technical arguments) the litigation was only possible because there was a decision by HMRC (to put the taxpayers into the first tranche of people, those who had to file their VAT returns online from 1 April 2010) whereas most people will have to file online from April 2012 by generally applicable legislation and not by an appealable HMRC decision.So…  judicial review of the legislation, would seem to be the next step for people who are affected by the change to online filing but unable to make the change by reason of age, disability, or inadequacy of broadband.

Now moving HMRC’s services online was part of a programme of change that came out of the 2006 Carter Review (which noted that:

3.7 Some people still expressed opposition, as a matter of principle, to compulsory use of online services, especially for certain groups, such as pensioners.

so HMRC can hardly claim they hadn’t been warned!)

Carter also was reporting from a different world, where online services would be accessible via free publicly funded services like libraries and HMRC enquiry centres:

5.9 We also recommend that HMRC should work with other public and voluntary organisations to ensure that access to the internet, and appropriate assistance with using IT, are available locally, for example at libraries and UK Online centres, for taxpayers who wish to file their returns online but do not own a computer.

The impact assessment for the Carter changes was updated in March 2009 and contains (at Annex C) a rather good suite of specific impact assessments including an Equality Impact Assessment and an assessment of the extent to which the proposals have been subjected to “rural proofing”.  My problem with these is that they are just words: it is no earthly use to anyone to identify that the solution may be:

through a visit to an Enquiry Centre (EC) to file (if mobility permits) or a visit by an HMRC employee with a laptop  [IA p34]

if you then close down the enquiry centres and fail to set up a mobile service of HMRC employees who can come round to your house with a laptop.

However the TIIN for the specific requirement for VAT to be filed online dismisses any concern for equality altogether:

Equalities impacts

Equalities impacts were considered in July 2008. This covered all the business taxes covered in Lord Carter’s report and concluded that the requirement to file online and pay electronically did not, of itself, disadvantage any specific group of customers from an equality standpoint (although, as with any change, some customers might need help to adjust).

Or, to put it another way, “we did this already, didn’t we?  Get stuffed.”

I look forward to seeing if the Ministry of Muggle Affairs chooses to fund a judicial review of the regulations mandating online filing.  If so, I’d be interested in seeing what they make of the equality assessment and its oh so helpful assumption that Carter is OK because HMRC thought about equality a bit in the noughties so we don’t have to bother with all that stuff any more.

Oh, and the rural proofing?

Other impacts


Yeah.  Right.


Ferris Bueller’s day off

February 7, 2013

As Ferris Bueller observed, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”  Looks like the Treasury have taken him a bit literally and stopped altogether – no doubt to take a better look.  Yes, the Tax Updates and Consultations Tracker page still hasn’t been updated since 14th December 2012 which I make to be 56 days and counting.  If we’re moving to a world where a consultation doesn’t need to last three months, shouldn’t we know a bit more about whether there are any and when they might close?

As it happens, there are in fact now three open consultations, aside from the technical consultation on the Finance Bill package.  But you won’t find them on the Treasury page, they’re on the HMRC page instead.

So let’s look at the first one, which closes on 14 March.  Consultation on the withdrawal of the VAT exemption for research.  Who should read this?

All suppliers of business or non-business research and those that commission research.

(Pauses to wave to everyone she knows in any university anywhere.  Helloooooo!)

Although it’s possible some of them already know.  Because, once the EU decided that the UK exemption from VAT for “business supplies of research between eligible bodies” doesn’t comply with EU legislation, well…

HMRC have had confidential discussions with some representative bodies with a view to obtaining the information sought in this consultation. As the outcome of these discussions was inconclusive as to the impact, we have decided to undertake a full consultation.

which I read as meaning “we asked them, and they gave us different answers, and – help!”

Let’s see.

I suspect it’s because a Venn diagram of “people who know anything about VAT” and “people who know anything about how university research is funded” would have about twelve people in the overlap bit and those twelve people have better things to do than seek out and respond to government consultations.  But I’m not sanguine that the government has got it right, or that the impact will be as slight as they seem to think.

In the “background” part of the consultation they identify three different kinds of research, research that is block funded or grant funded and so is “non business” research – and so outside the scope of VAT.  Phew!  And then there’s business research, where a company pays a university to carry out some research for it, and expects to make a profit from exploiting the intellectual property so created.  And the third category, the one affected by the change, is where there’s a contract between two “eligible bodies”, where “eligible bodies” means a university or public body or similar.

So – taking a not random example – I once took part in some medical research, where the research was (as far as I knew) conducted by a university and funded (so far as I know) by part of the NHS. Those would both be “eligible bodies” if I understand the consultation document.  So their contract would, in future, have to include VAT in any payment.

OK then – does that affect anyone, and how are they affected?

Let’s look at the hypothetical examples.

1). A charity grant funds University A to carry out some research. The supply University A makes to the charity is outside the scope of VAT. However, University A needs to subcontract part of the research to University B. At present, the supply University B makes to University A is exempt from VAT but after the exemption is withdrawn it will be taxable (20% VAT). This will not affect the supply University A makes to the charity which will remain outside the scope of VAT.

In this scenario, University A’s costs increase by the VAT charged by University B. However, since University B can now deduct input tax on making this supply, this may allow, in some cases, for a lower net price to be charged to University A.

I do enjoy that “may” and “some” – in other words, because the university which has to charge VAT may also be able to deduct any VAT it suffers in carrying out the research, it might be able to charge less.  This is not a simplifying measure, and the consultation seems to me to grossly underestimate the amount of effort which goes into devising asymmetrical VAT schemes that seem to offer people the holy grail of being able to buy stuff without paying VAT but not to charge VAT on the stuff they sell.  I wouldn’t mind betting that one of the reasons the hypothetical twelve people who understand VAT and research funding aren’t responding to the consultation is because they are busy wondering how they can make sure that everything they buy goes into the non-exempt contract, and everything they sell winds up outside of it.

Then there’s the second example.

2). A commercial company provides funding to University Z to conduct research with the expectation that there will be intellectual property produced. The supply made by University Z to the commercial company is a standard-rated business supply. However, University Z needs to subcontract part of the research to University X. At present, the supply made by University X to University Z is exempt from VAT but after the exemption is withdrawn it will be taxable (20% VAT). This will not affect the supply made by University Z to the commercial company which will remain taxable at the standard rate.

In this scenario, University Z’s costs will be the same since they will be able to deduct the VAT charged by University X as directly attributable to their onward supply to the commercial company.

I know that VAT is theoretically meant to be a simple tax which is only charged once in any transaction, and that the VAT charged and paid theoretically cancels itself out in all the other steps in a supply chain, but do we really want our universities to be places where serious intellectual effort is diverted into understanding and operating VAT?  I mean, I’m not a VAT person myself, but doesn’t the same “la la la, they’ll be able to charge less” condition apply to University X in example 2 as to University B in example 1?  And isn’t the idea that they “may” charge less as a result as weaselly in example 2 as in example 1?

Incidentally, if you want a succinct summary of what government thinks of universities, look at their description of non-business, exempt research.

Typically, the research does not give rise to intellectual property that will be exploited

There’s no money there, so who cares.

Here’s my response.  Feel free to adopt or adapt if you want to add your own two-pennorth to the consultation response.

This is an individual’s response and will also be published, with commentary, on my website at  I am a researcher into tax simplification and better regulation but responding in a private capacity.
1.  Your consultation questions do not seem to me to be designed to satisfy any of the “possible reasons to consult” listed in the Cabinet Office guidance.  They are not designed to garner views about the government’s proposed course of action nor to determine or evaluate options as to how to achieve a policy objective but are asking solely for factual information about how much research is commissioned or received in different VAT-able categories.  As such it does not seem to me that this is a “consultation” as it is generally understood.
2.  While I understand that you need factual information about what type and value of research exists in order to test whether there might be unintended consequences of the proposal to abolish the exempt category, a formal written consultation put out onto a website is not a useful way of eliciting this information and nor will it enable you to know whether you have the full picture or simply the responses of people who are sufficiently engaged with government policy-making to know of the existence of the website and spot the consultation.  An email to an appropriate person at each UK university might have been more effective as a simple call for evidence.
3.  You also mention in the consultation document that you are looking at whether there are options to mitigate the impact of the withdrawal, and to look at whether any transitional arrangements are necessary.  However you do not appear to have asked any questions designed to elicit responses on mitigation of the impact, and I cannot see that your questions 8 and 9 are capable of being answered by someone who is not a VAT specialist so will not give you any useful information on the need or otherwise for transitional arrangements.
4.  Your tenth question (as well as being hidden beyond the fold of the final page) also asks for comments about the “administration burdens” of the withdrawal.  I am assuming by this you mean the “administrative burden” as calculated using the standard cost model, ie the deadweight cost of administration of the tax system, but you neither mention nor explain this term elsewhere in the document so that respondents who are not specialists in the field might well fail to understand the question you are asking.  In my admittedly limited experience the administrative burden is likely to be a significant imposition, but I am a self-funded researcher so I can’t assist you in quantifying it.
5.  I am, however, astonished that your impact assessment makes no preliminary estimate, or gives even an overall ball park figure, of the administrative burden that will be imposed.  It is my understanding that you ought to be able to produce this figure by plugging in the legislation (quoted at the end of the consultation document) and the number of bodies affected (presumably all UK universities?) into the Standard Cost Model to give a preliminary estimate of what the burden is now and how you expect it will change as the number of bodies affected changes, so that respondents can see at a glance whether or not the impact is estimated to be significant.   My estimation is that it will have a significant impact on a relatively small number of civil society organisations and I am therefore surprised that you have not gone beyond “minimal but-” in the TIIN.