Preparing for the Next 50 Years of Value-Added Tax in the UK

It was widely publicized that the UK’s value-added tax was 50 years old in April and, quite rightly, the Institute of Chartered Accountants in England and Wales gathered together the great and good of the VAT world to celebrate.

The event was a great success, including a review of past highlights. Appropriately, though, for a tax that is subject to constant legislative and case law change, most of the time was spent looking to the future, and it’s on this topic that I will share some thoughts.

UK and EU Divergence

Since the UK’s departure from the EU, many of the key VAT issues businesses and practitioners have been grappling involve the new rules related to imports and exports.

The UK being out of the Customs Union meant many changes to legal and physical supply chains, requiring businesses to embrace and adapt to new compliance obligations. Some tasks were also lost, like EC Sales Lists for goods moving from Great Britain (England, Scotland and Wales) to the EU—although not, of course, for goods moving from Northern Ireland to EU member states.

However, the EU is now deep into discussing its VAT in the Digital Age proposals that focus on future changes to compliance obligations. Significant changes to the VAT rules aren’t envisaged; instead, there will be a significant evolution in how VAT is accounted for and collected.

ViDA is focused on three important pillars:

• Digital Reporting. To replace traditional PDF and paper documents, e-invoicing will become mandatory for business-to-business sales domestically from 2024. This also will apply for cross-border EU transactions in 2028, alongside real-time reporting (within two days) of the same transactions.
• Marketplaces. The successful initiative in making online marketplaces such as Amazon and eBay responsible for collecting VAT for many users of their sites will be expanded. Online marketplaces involved with supplies of transport and accommodation will become liable for VAT on sales routed via their businesses.
• One-Stop Shops. Currently, the Import One-Stop Shop and Union/Non-Union OSS systems operate to simplify VAT filing for businesses. From 2025, it is envisaged that these OSS systems also will facilitate filing for EU cross-border B2B movements of goods and a wider range of business-to-consumer supplied services and goods.

It will be EU businesses that are predominantly impacted by the ViDA changes. However, all those UK (and any other non-EU) businesses trading internationally and aiming to enter new markets also will need to be aware, because—depending upon their supply chains—it may become relevant.

The UK’s tax authority, HM Revenue and Customs, doesn’t have to focus on these changes, apart from considering how they apply for some Northern Irish business transactions. This has left the UK free to follow its own path, and to date, this has involved the rollout of the Making Tax Digital initiative. While this does mandate businesses to keep digital records, its key component was to require VAT returns to be submitted by an application programming interface link.

It’s not controversial to say that MTD is very much “light touch” compared to the EU’s ViDA proposals and some of the real-time reporting, such as the Immediate Supply of Information System already in place in Spain, when considering the technological demands it places on businesses.

Split payments may be the next development as this proposal is out for consultation by HMRC. This idea, which sees customers pay the VAT element of their costs to a specific “VAT bank account,” hasn’t taken off in the EU. However, it could be a very effective system in the UK if rolled out successfully.

What all the above does show, however, is that the next phase of compliance obligation changes will be diverse and will require real investment and understanding by businesses to meet them. Those trading in multiple territories will be most impacted.

The Technology Question

Several speakers at the ICAEW event extolled the virtues of different technologies and how they might impact VAT. This included an excellent session on ChatGPT to demonstrate how, among other potential benefits, artificial intelligence can write quite good reports on the VAT rules. How those are then applied to real business situations isn’t entirely clear yet, but it’s a space worth watching.

There was also insight from e-invoicing providers and advisers who have seen changes like those within ViDA rolled out in other countries. The clear message was that whatever the changes imposed by tax authorities may be, the way to manage this effectively will be via understanding a business’s data streams.

For instance, issuing an e-invoice likely will be simple to achieve via the use of bolted-on third party software. The real challenge, though, will be setting up and configuring the technology to make sure there is robust data collection to populate the invoice and put it in a location that allows the software to pick it up.

Most accounting systems will have the information required; however, it would need to be verified by a human being. If the systems are fed by data streams from, say, an online shopping e-commerce engine, then that also will have to be checked. Any errors in either system (such as the wrong VAT rates) will lead to the incorrect amounts of tax being accounted for.

Key Takeaways

Change is coming and it won’t be possible to ignore it. Businesses need to be proactive, both in meeting their compliance obligations and in helping themselves to maximize their cash collection.

If one action can be undertaken to help businesses prepare now, it would be to map all data flows and then document the information held in the resulting reports generated from this process—what is the currency, are dates invoice or transaction, etc.

If done correctly, this should give businesses and other entities collecting tax a solid base to manage their VAT obligations for at least the next 15 years—and hopefully a little longer.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rob Janering is partner, VAT and Customs Duty services, with Crowe.

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