Posted: 1. July 2019 by: Rupert Tennant

The Biggest Problems for VAT Payers

VAT is one of the most common taxes in the UK. It’s the tax paid on the value added to the goods and services you’re buying. That means on the amount the seller is earning from it. It makes it a simple tax where everyone in the link of production is paying their part.

However, there are also problems with it that many taxpayers need to deal with since it’s not a tax you can avoid, and there are many reliefs that are available to those pay this tax.

MTD

Making tax digital is a long-term initiative made by HMRC to make all tax records and tax-paying digital. That is supposed to be done with all taxes and all businesses over time, but it will start with VAT since that has been prepared for years. It started now in 2019.

This will require a business that pays VAT to have software with which they will record their income, their tax obligations and what they need to pay.  It can be a software solution they choose, but one that is approved by HMRC.

High threshold

At this point, the threshold for paying VAT is set at 85.000 a year, but not in income but in turn over. This is too high, and many small businesses that don’t meet it want to pay VAT either way. That’s because there are tax breaks for those who pay it and because it makes it easier to plan for tax payments in the future.

Many decide to pay VAT either way, but since that’s already the case, there is a plan to lower this threshold. As is often the case with asking more businesses to pay taxes, it’s not a popular political move, even though it might be beneficial overall.

Higher prices

Simply put, once the business starts paying VAT, that essentially means that they need to increase the prices of their products and services to cover the new cost they need to pay. It’s always the end-user that pays the increase in taxes.

This may be a problem for a small company since they might end up using customers and clients who aren’t able to pay the larger price. That can be offset by other benefits coming from being a VAT payer, but it doesn’t have to be, at least not entirely.

International VAT

Things get a bit more difficult when your products are made as a part of the international effort.  VAT needs to be paid in both countries, and it depends on the policies set by both countries. This is much easier within the EU, which is treated as a single market.

It’s still not clear how this will be handled when the UK leaves the EU. It’s possible that the UK will have an individual VAT deal with each EU country or with the EU as a whole. It remains to be negotiated with the EU.

Additional expenses

There are additional expenses that a business paying VAT will need to take on. That could be one of two expenses. You might need to purchase a software solution for this purpose and to pay for the training for your employees to use them. Alternatively, you may need to hire additional accountants.

There are also immeasurable expenses that come from spending your time dealing with taxes instead of spending them on something that might have been more lucrative for your business. It’s therefore useful to know how much your hour is worth so that you know how much you’re wasting.

The rates

As is the case with any tax, the rates that are set for it are always in dispute. It’s an arbitrary number set by the government. The government always thinks that it could be raised a bit without causing problems.  At the same time, the businesses believe that they could be lowered with a lower threshold as well.

However, this isn’t the biggest issue with the rates. The issue comes from the fact that the rates are set by Parliament. That means that they could be changed every tax year and that’s difficult to plan around.

Conclusion

VAT tax is usually considered to be fair and transparent, and for the most part, it is just that. However, there are problems with it, just like there are problems with any other government policy. Some of those are the problem for the government and the public services paid by those taxes, and some are the problem for the taxpayers. These are mostly about the systems that need to be put in place in order to record and pay the taxes, which are in the end transferred to the buyers and clients. This is, even more, the case now when the tax is made digital, and transition takes time.

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