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Why VAT matters

The taxation agenda in Northern Ireland has been driven by the campaign for powers to set its own rate of corporation tax. However, research has shown that there has been a discernible shift by governments in the focus on taxation from direct to indirect taxes.

Most governments believe that indirect taxes have less of a negative impact on economic growth than direct taxes and VAT rate increases are viewed as less inflammatory than income tax increases. There is clear evidence to suggest that in developed tax jurisdictions VAT rates and excise duties are increasing and there is a focus on compliance and enforcement by tax authorities.

In the UK this focus is unlikely to change even in the event of a vote to leave the EU in June’s referendum.

Whilst the UK corporation tax rate has been reduced over the past few years, the rate of VAT was increased to 20% in 2011 and there are currently no plans for this to be reduced.

This means that the effective management of VAT is essential for Northern Irish businesses to support growth and reduce costs and risk. This involves identifying and quantifying the VAT that a business currently pays and reclaims, identifying and quantifying areas of current and future risk and opportunity, ensuring there are clear responsibilities for managing an organisation’s VAT and ensuring that all parts of the business that have a stake in managing and improving its business performance are involved, e.g. tax, finance, operations procurement and the property team.

The challenges for businesses to overcome in Northern Ireland can be divided into four areas:

  1. compliance which involves the accurate preparation, review and submission of VAT and other VAT returns;
  2. the person responsible for VAT compliance should be central to the changes in the supply chain;
  3. the business must be aware of the effect that changes to VAT legislation can have; and
  4. the business must actively manage its risk in respect to VAT to reduce the impact of any tax issues with HM Revenue & Customs (HMRC).

Northern Irish businesses that operate across multi jurisdictions should be aware that research has shown that the burden of indirect taxes is greater than other taxes. Whilst there is an understanding that the EU has a harmonised system of VAT it is clear to both taxpayers and tax advisers that the complexity of VAT should not be under estimated and it is essential that all businesses periodically review their processes to, if possible, reduce liabilities, improve cash flow and manage compliance costs.