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The Future of VAT

Posted: July 2, 2019

Recent months have seen significant changes to the VAT system in the UK with the introduction of Making Tax Digital (MTD) and further changes are due to be implemented later in the year including a new domestic reverse charge system for the construction sector.

The new Making Tax Digital regime is however intended to be only an initial staging point on towards the transformation of the VAT system through the use of digital technology.

The next step? Transactional Data through MTD Filings

The logical next step will be an extension of MTD to include transactional data. Currently MTD filings include only the numerical entries from the nine boxes on the VAT return but a relatively straightforward addition is likely to be the submission of transactional data in MTD filings. This would, potentially, allow HMRC to review individual transactions through MTD filings.

The main challenge here for HMRC will be developing the ability to process huge volumes of transactional data.

Split Payments

Perhaps somewhat further away but HMRC are actively reviewing these arrangements and these are now in place in some countries. HMRC have already conducted a consultation in late 2018 on split payment arrangements and confirmed that “The government views split payment as a potential long-term solution” – so whilst not likely imminently these arrangements are certainly under consideration.

See the box to the right for details of how split payment arrangements could work.

Extensions to Reverse Charges

Already scheduled to apply for the construction sector from October – but further extensions to this, in other sectors, would not be unexpected.  These changes are based on the realisation from HMRC that the further down the supply chain VAT flows the more leakage there is from the system.

Reverse charge mechanisms retains VAT higher up the supply chain – with larger businesses – and theoretically restricts this VAT leakage.

There is some suggestion that, longer term, VAT could move towards a more generalised reverse charge mechanism for business to business transactions. Hungary is one example where much broader reverse charge mechanisms are already in place.

Direct Access – ‘Big Brother’ VAT Administration

Potentially the end result of the digitalisation process and likely to be some way into the future – however it would be easy to consider this as being the intended end state of the MTD process.

In this scenario HMRC would have direct and real time access into the transactional records of a company. HMRC could at any time review accounting transactions and VAT records. Whilst unlikely to be imminent new accounting systems provide the foundations for this to be developed in the future.