April 1st marks half a century since the introduction of value-added tax (VAT) in the UK in 1973 by Chancellor of the Exchequer Anthony Barber, who dubbed this ‘a simple tax.’ However, 50 years later, the majority (71%) of UK VAT registered businesses argue that business taxes, including VAT returns, are too complex and confusing, according to new research from tax compliance technology company Avalara.
Complexity is costing businesses time and money
Failing to keep up with the complexity of VAT legislation and regulatory changes, nearly a quarter (24%) of UK businesses have been audited for filing their VAT return inaccurately or late, and 20% have accidentally overpaid on their VAT return. In an attempt to mitigate against this, nearly half (46%) of businesses are spending 10-40 hours each month on ensuring their business is VAT tax compliant, including checking transactions, doing VAT returns, and researching different tax laws.
A new VAT penalty regime took effect in January 2023 that assesses penalties and interest on late return submissions and payments. VAT returns will be penalised based on penalty thresholds determined by a new points system. A business will lose one point each time it delays filing a return, until it reaches the penalty threshold and receives a £200 penalty. Furthermore, businesses will also be fined £200 for each subsequent late filing.
Prior to that, on November 1st 2022, HMRC shut its legacy web portal used by businesses for filing VAT returns. With no alternative way of filing UK VAT returns outside of Making Tax Digital (MTD) compatible software, the ‘soft landing’ period to allow businesses to get their digital links into place came to an end. As a result, approximately 832,000* UK VAT registered businesses were at risk of hefty penalties.
April Fool’s Day tax continues to trick businesses
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The tax that originated on April 1st has “fooled” UK businesses since its introduction 50 years ago. Over half (51%) of business decision-makers would struggle to confidently explain their business’ VAT obligations to someone outside of the business – highlighting the level of confusion that exists even at a senior level.
Despite this confusion, nearly a third of UK businesses (29%) are hesitant to invest in technology to help streamline their tax function to help with the calculation and reporting of VAT. Only 46% of UK businesses have invested in technology to support in the filing of VAT returns, and just 43% lean on technology to support their business in the preparation of VAT returns.
High fines due to non-compliance is a burden businesses cannot afford to take on in the current economic climate. To help navigate their VAT obligations, the majority of business decision-makers (93%) are in favour of a movement to simplify the rules around VAT for businesses.
Avalara senior director of global indirect tax, Alex Baulf, said: “From Jaffa Cakes to Cornish pasties, VAT has been stumping businesses for five decades. However, it really can be a simple tax, as Anthony Barber intended it to be. Complexity in calculating the right rate of VAT at the point of sale, and then preparing a VAT return are two of the main pain points businesses face, leading to increased stress, time and effort, and ultimately risk of making errors. However, by adopting technology, businesses can really streamline and automate VAT processes, reducing the risk of errors and penalties, and the headache associated with staying compliant.
“VAT shouldn’t be the tail that wags the dog. Businesses should have confidence in their VAT obligations, from invoice to return, so they can instead focus on the things that matter, like growth”.