Value Added Tax (VAT) is an indirect tax collected on the value added at each stage in the production and distribution of goods and services. It forms part of the final price paid by end consumers and is thus a consumption tax. VAT is charged by registered businesses at each stage of the supply chain, with businesses able to claim back VAT on goods and services purchased and used for their business activities. The net VAT payable is the difference between VAT collected on sales and VAT paid on purchases. This means that the burden of VAT falls on end consumers.
VAT is administered in the UK by Her Majesty’s Revenue and Customs (HMRC). The HMRC VAT office oversees VAT rules and regulations, provides guidance for businesses, handles VAT registrations and accounting schemes, processes VAT returns, and conducts audits and inspections. Overall responsibility for VAT policy and legislation rests with HM Treasury and Parliament.
Within HMRC, the detailed administration of the VAT system is the responsibility of the VAT Business Unit. This unit consists of various teams with specialist knowledge in different aspects of VAT. These include registration, accounting schemes, helplines, legal interpretation, debt management, criminal investigations, policy, intelligence, and internal compliance.
Current Managing Director of VAT
The current Managing Director of VAT in HMRC is Angela MacDonald. She was appointed to this role in April 2019.
As Managing Director of VAT, Angela MacDonald has overall responsibility for the operation of the VAT system. This encompasses:
– Overseeing VAT policy, legislation and operational activity
– Leading engagement with customers, stakeholders and staff
– Ensuring VAT objectives are delivered
– Driving improvements in VAT processes and digital services
– Managing VAT compliance approaches including debt and criminal investigations
– Monitoring and enhancing the performance of the VAT business unit
MacDonald reports directly to Jim Harra, Deputy Chief Executive of HMRC and Second Permanent Secretary at HM Treasury. She is also a member of the HMRC Executive Committee.
Background and Career
Angela MacDonald has over 25 years of experience working in taxation roles within HMRC. She joined HMRC (then known as HM Customs & Excise) in 1994 as a Tax Inspector.
Her early career focused on direct taxes including income tax, capital gains tax and inheritance tax. During this time she worked in various compliance and intelligence teams.
In 2004, MacDonald moved into indirect taxes, taking on leadership roles in VAT compliance and criminal investigation. She helped drive improvements in VAT debt management, tackling missing trader intra-community (MTIC) fraud, and the hidden economy.
Prior to becoming Managing Director, MacDonald was Director of Indirect Tax and Tax Credits Compliance where she led a range of compliance, intelligence and operational policy teams. She successfully delivered improvements in the performance and efficiency of these teams.
According to her HMRC profile, MacDonald is focused on transforming the VAT business by exploiting new technology and tools to improve both customer experience and operational effectiveness. She aims to retain high levels of voluntary compliance while making it easier for taxpayers to get things right and harder for the minority who seek to exploit the system.
VAT Administration in the UK
Value Added Tax (VAT) was introduced in the United Kingdom in 1973 as a result of the country joining the European Economic Community. It replaced the previous Purchase Tax and Selective Employment Tax.
The standard rate of VAT in the UK is currently 20%. Reduced rates of 5% and 0% apply to certain goods and services such as domestic energy, children’s car seats and most food. Some services like insurance and education are exempt from VAT.
VAT law in the UK consists of national legislation contained in the Value Added Tax Act 1994 plus various Statutory Instruments. This is underpinned by European Union VAT law contained in the EU VAT Directive. Brexit will eventually allow the UK to diverge from EU VAT rules.
VAT revenue collected by HMRC totals around £130 billion per year. This represents over 15% of total UK tax revenue. There are around 2 million VAT registered businesses in the UK.
VAT Registration
A business must register for VAT if its taxable turnover exceeds the VAT registration threshold. The current VAT threshold is £85,000 per year. Voluntary registration is possible for businesses with turnover below the threshold.
Once registered, a business must charge VAT on its sales of standard or reduced rated goods and services. It can reclaim input VAT paid on allowable purchases. VAT returns are submitted online to HMRC every 1, 2 or 3 months.
De-registration is required if turnover falls below the deregistration threshold of £83,000 per year.
VAT Rates
The main VAT rates in the UK are:
| VAT Rate | Goods and Services |
| Standard rate – 20% | Most goods and services including motor fuels and alcohol |
| Reduced rate – 5% | Domestic energy, children’s car seats, some residential property works |
| Zero rate – 0% | Most food, books, newspapers, new housing, international services |
Some services like education, health, finance and insurance are VAT exempt meaning no VAT is charged but input VAT cannot be recovered.
VAT Compliance
To maintain VAT compliance, registered businesses must:
– Correctly charge VAT on taxable sales
– Pay over VAT collected to HMRC
– Accurately reclaim input tax on allowable purchases
– Keep proper VAT records for stipulated periods
– Submit VAT returns on time
HMRC carries out a range of activities to ensure compliance:
– Guidance and education to help businesses comply
– Processing and risk assessing VAT returns
– Audits and inspections of business records
– Penalties for errors and late filing/payment
– Criminal investigations into serious VAT fraud
Public Perception of VAT
As a visible tax charged on sales, VAT is very apparent to consumers. It can influence public perceptions about taxation and trust in HMRC.
Some key perceptions about VAT held by the UK public include:
VAT Raises Significant Revenue
Total annual VAT receipts of around £130 billion means it raises more tax than other visible taxes like fuel, alcohol and tobacco duties. The public sees VAT payments deducted on most purchases so are aware of the tax’s revenue generating power.
VAT is Generally Accepted
Opinion polls indicate the majority of the UK public regards VAT as quite acceptable and preferable to other forms of taxation. This relative acceptance reflects VAT’s broad base which spreads the burden.
VAT Can Be Seen as Regressive
As VAT is levied at a flat rate, no allowance is made for ability to pay. Poorer households typically spend a greater proportion of income on VAT than wealthier ones. This can lead to a perception VAT is regressive.
VAT Can Appear Complex
Explaining features like VAT registration thresholds, zero rating of foods and VAT exemptions requires effort. This can foster a view of VAT as a complicated tax for the public to comprehend.
The Standard VAT Rate Seems High
The standard VAT rate of 20% in the UK is high by international standards. For expensive purchases it can add substantially to prices, affecting public perceptions.
VAT Avoidance Causes Resentment
Media stories about VAT fraud and avoidance fuel public resentment and the view that VAT is not applied fairly across all businesses. This damages trust in the tax.
The Future of VAT
VAT has been a core part of the UK tax system for 50 years but likely faces change in coming years both domestically and in terms of international coordination.
UK VAT Policy
Following Brexit, the UK now has freedom to modify VAT rules. Potential reforms include:
– Changing UK VAT rates and thresholds
– Introducing VAT reliefs for new sectors
– Simplifying complex areas like financial services VAT
– Moving closer to a sales tax model akin to other countries
However, as VAT raises substantial revenue and applies across the EU, radical overhaul appears unlikely.
Technology and VAT Administration
Emerging technologies could transform VAT administration:
– Increased automation of routine compliance processes through artificial intelligence and machine learning.
– Cloud computing enabling analysis of VAT ‘big data’ to target non-compliance
– Blockchain digital ledgers increasing security and transparency of VAT reporting
– Cashless payment systems capturing real-time VAT data could simplify reporting
This could cut costs while improving customer experience and anti-fraud efforts.
Global VAT Coordination
As global trade grows, greater coordination between national VAT systems would be beneficial through measures like:
– Multilateral VAT treaties setting common administrative standards
– Convergence of VAT rates between countries
– International sharing of VAT data and fraud intelligence
– Common VAT reporting and collection mechanisms
However, agreeing such reforms represents a major long-term challenge.
Conclusion
VAT is a crucial tax for the UK, raising substantial revenue vital for funding public services. Administration of the VAT system is complex but HMRC has built a substantial infrastructure to register taxpayers, collect revenue, provide guidance and enforce compliance.
The Managing Director of VAT oversees these operations which involve specialist teams and aim to exploit technology to improve customer experience and effectiveness. While novel uses of data analytics and AI could transform VAT operations, major changes to UK and global VAT policy seem more long-term. Overall, despite frustrations over its complexity and high standard rate, VAT remains an accepted, efficient tax.
