| VAT self assessment; A new idea, A new perspective.
I come across this idea of VAT assessment based on European regulations related to VAT.
Under new EU rules if you are selling any product or service to another company based in EU and if they are VAT registered in their country, you do not charge them VAT, instead they self assess their VAT at rate of their country in their VAT return.
And then I got one brilliant idea….what if we implement same system for transactions happening in the UK, where you don’t have to charge VAT to other business (and don’t have to pay either).
Before I talk about my brilliant idea, lets understand how VAT system works?
There are many wise accountants and academics who can give tonnes of information about VAT, but I look at it this way……
Consider that you are VAT registered.
1. If you are buying any product or services and if you are charged VAT, you simply pay them and claim that VAT back from government (HMRC).
2. If you are selling any product or services, charge VAT on top of your price and pay that to HMRC.
Further…
If your client is also VAT registered, they will claim that VAT back from HMRC. SO in reality few businesses pay VAT to HMRC and others will go and claim it back from HMRC.
If you are selling goods or services to NON-VAT entity, then that VAT goes into HMRC pocket, its not claimed back from them.
Considering this system, HMRC only acts as transaction medium between all VAT registered entities. Actually HMRC does not generate any revenue until it comes across someone who is NOT VAT registered.
So, if there is a bunch of businesses (10,100 or even 1000-1000000), which are all VAT registered, they do lots of transaction between themselves and HMRC, end of the day they pay nothing to HMRC. NO revenue generated into HMRC account.
So this whole exercise is wastage of resources and unnecessary payment transactions!!!
You might argue…
When you are paying to HMRC, you pay difference between your purchase VAT (to claim) & sell VAT (to pay). So end of the day you are paying nothing. You are just making transactions. But one point to consider, most of businesses have more sell than purchase, so they are typically paying collected VAT to HMRC. OR if you are exporter, you are typically claiming more VAT form HMRC.
So whats the problem?
1. unnecessary payment processing
2. transaction fees on unnecessary payment processing by banks.
Most of businesses are charged 35p to 70p per £100 deposit/payment by cheque. If we consider average businesses doing transaction of 20K p.a. on VAT payments, in total all businesses collectively paying out at least £1,000,000 in bank charges for something which does not have any meaning whatsoever.
Billions of pounds of unnecessary transaction happen between all these entities.
Consider this new process
1. During selling process seller will not charge VAT if purchaser is VAT registered, instead leave it for purchaser to self assess this VAT in their VAT return. Both parties include that in their VAT return, without making any VAT payment transaction. Since VAT is not collected from purchaser, seller will not pay that to HMRC. Similarly since purchaser did not pay VAT while purchasing, they cannot claim back from HMRC.
2. BUT If you are selling to a NON- VAT registered entity, you charge VAT, collect and submit it to HMRC.
If you calculate wisely, NET VAT received by HMRC will remain unchanged with new system.
And this will solve many problems:
1. Businesses which mostly deal with other businesses, will have reduced payment transactions, thus reducing headache at the end of quarter for VAT payments.
2. Savings on payment transaction fees.
3. HMRC will have more relief, less claims to deal with and less money transactions to handle. Also this will reduce operations cost to chase for VAT payments.
4. HMRC can concentrate their effort on businesses which mainly deal with end consumers (which are likely to generate revenue). Thus reducing operations cost.
5. Importer of goods does not have to pay VAT while importing if they are VAT registered (currently they pay VAT while importing and then claim it back end of the quarter anyways!)
6. Exporter of goods or services; who is VAT registered, will not have anything to claim (since they did not pay VAT at the first place while purchasing goods from their supplier!).
Other things to consider:
- Its not simple but not unachievable either.
- VAT on client entertainment and other cases where VAT cannot be claimed back, should be dealt appropriately. It needs more education.
- Accountants and software vendors may have to change their systems to deal with this scenario.
- Import & export accounts will be affected. HMRC will have to target different category of people to combat fraud.
Hey one important thing: Nothing will change for you if you are not vat registered. You keep paying VAT on your purchases, you can’t claim it anyways.
Disclaimer: I come from IT systems background and this article looks into providing better system which has obvious benefits. I do not come from accounting background nor I claim any expertise into Taxation or VAT issues. This article does not go into details of HMRC or its taxation process, it can be dealt with when they are ready for such system. I will be happy to receive comments from experts in this area though.
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