Definining Value-added Tax – An Introduction
Value added tax is an essential component of any economy that wants to generate a substantial amount of revenue based on the economic activity conducted in the realm of its governance. Scholars tend to define Value Added Tax or VAT as the tax imposed on the products and services purchased or sold in an economy. At certain points, it is also referred to as General Sales Tax or the tax that is imposed on sales of general goods and services. The main purpose of the imposition of VAT is to ensure the fact that within the economic system of a country the costs that are involved in providing the necessary infrastructure to ensure that the businesses are operating with all their magnitude can account for the incurred costs.
Within the UK there are various types of VAT rates that can be termed as the Standard Rate, the Reduced Rate, and the Zero Rate. As for the Standard Rate which is 20%, it is the applicable tax on most general goods and services. Moving on to the reduced rate, it varies from industry to industry but the minimum in the UK is 5% currently. A few things on which a reduced rate is applicable are goods and services that are related to hospitality, energy-efficient businesses, and entrance fees to different public places. The zero rate is a 0% tax on books, a few social housing programs, categorized pharmaceutical products, categorized medical treatments, and a few categorized general equipment.
The importance of value-added taxation cannot be overlooked and requires immense consideration from the enterprises involves in the domain of this taxation. This blog would provide a bird’s eye view of the entire VAT system in the UK and would cover all the necessary points that are required for the smooth operation of your business.
Value-added Taxation Process in the UK
The UK tax system is one of its kind in the modern neoliberal economic system and is based on ensuring tax transparency and revenue generation from businesses. For the current fiscal term, the threshold for UK VAT is limited to £ 85,000. One can reasonably comprehend the fact that based on this threshold issued by the government, just in case a respective company’s business-related turnover is more than this threshold they are legally obligated to pay the VAT by registering for it. Failure in doing so in a span of a month would result in a fine and legal action by the government. You can register for VAT online or through an agent, but this can be tricky sometimes so it’s highly advisable to find a good accountant for it.
A very widely debated issue is the constant rise in the VAT threshold in the UK which saw a rise from £64,000 in 2007 to £85,000 in 2021.
One must keep that in consideration that while operating a business that is related to VAT, the person must keep checking updates from HMRC for ensuring that their business doesn’t exceed the limit for the threshold to avoid a penalty. In that scenario, one must always make use of VAT calculation software or stay in touch with business accountants to ensure that the businesses meet the necessary prerequisites of a legal business. The VAT turnover is entirely based on a 12-month period that starts from any given point in the year as it takes into perspective the fact that the threshold made by the government is not exceeded and once it exceeds that registration must come into effect. Certain circumstances ensure the fact that the enterprise must get ensured for the VAT if the business is being done with the party which is already in registration for the VAT.
Impact of Brexit on VAT
Following the mechanics that involve VAT, once an enterprise is registered for VAT they are given a VAT reference number by the HMRC. The VAT registrations ensured in the pre-Brexit era that the number can be used through the VAT Information Exchange System or VIES which allowed businesses to conduct business activities in the EU region as well as the UK.
The picture has now transformed completely in post-Brexit Britain as registration via VIES would no longer be acceptable. This loophole in the system allows a higher proportion of UK-operated enterprises to become open to VAT-related tax fraud that can exploit this weakness in the system. The HMRC in this context provided an alternative tool for checking that can be used to ensure that UK businesses can operate in a valid pathway in the EU region when it comes to dealing with outside businesses.
The Digitisation of VAT
Across the globe, various measures have been adopted to avoid tax evasion by various parties. However, the most common cause for the problems of financial irregularities is the inability to trace a trail of business that comes from various economic indicators. The most common solution to these problems is the digitalization of the system which helps not only identify any sort of financial misconduct in the system but also strengthens the taxation power of the government. It becomes pertinent by using digital modes of interpretation of financial analysis that can help to properly distinguish between irregular proceedings.
The UK government in this context made significant steps back in 2017, with the introduction of Making Tax Digital to smoothen the process of tax collection. Such that since 2019, any enterprise that had a VAT-related business was supposed to maintain its tax records in a digital form that can keep it possible that tax records are always accessed the ease that is offered to the government as well as the consumers. Moreover, the submission of tax returns was also made compulsory to be done via the use of MTD or Making Tax Digital to HMRC. To register for MTD businesses have to get compatible software. There is a variety of software available in the market but we can find the list of recommended ones on the UK Government website. These mechanisms are adopted to ensure that the transparency in the tax collection process remains smooth and there are no tax evasions by any party.
The solution to VAT-related issues
One can reasonably understand that for a layman, getting into the issues of sorting your tax problems might be a great deal of effort. While sorting out your vagaries related to VAT may be a hassle, an accountant might help you fix the problem. One can look for accountants by consulting an accounting firm or looking for a referral from an accountant to help solve the problems related to VAT. There is also another possibility that involves looking out for an online accountant via the online accounting schemes started by various companies. However, you should be careful while looking out for such options as there might always be a chance of online scams that can result in an economic loss. Accountancy consultancies provide a great deal of help in this regard to deal with all the problems of value-added taxation.
References
Chan, S.G., Ramly, Z. and Mustapha, M.Z., 2021. Value added tax and economic efficiency: Role of country governance. Panoeconomicus, 68(3), pp.325-358.
Freedman, J. and Loutzenhiser, G., 2022. Tax policy in the UK post-Brexit. Oxford Review of Economic Policy, 38(1), pp.188-204.
Webley, P., Adams, C. and Elffers, H., 2002. Value Added Tax Compliance in the United Kingdom. Behavioral Public Finance.
The Value Added Tax (Amendment) (EU Exit) Regulations 2021