ICAEW is calling on the Chancellor to use the Budget to consult on sweeping reforms of the UK’s “outdated and overly complex” VAT system.

According to the institute, adopting a lower, single rate of VAT across a broader base would make it fairer and easier to do business, while generating billions more in tax revenue.

Alan Vallance, ICAEW Chief Executive, said: “Multiple rates, numerous exemptions and the registration threshold cliff-edge discourage growth and make doing business too difficult. 

“VAT is a major pillar of the UK’s fiscal framework, so it’s essential that the system operates efficiently. A fit-for-purpose system, with simplicity and fairness at its core, will not only give business a lifeline, but as our calculations show it could also give the Treasury a much-needed boost to stabilise the public finances, support the poorest households and limit the extent of impending, painful tax rises in other areas.” 

Single rate of VAT

In its submission to HM Treasury ahead of the Budget, ICAEW argued that the current system of multiple rates and exemptions created complexity without strong evidence of delivering fairness or targeted support.

Currently VAT represents the UK’s second largest source of tax revenue, generating £171bn in 2024/25 – approximately one-fifth of total tax receipts. 

ICAEW calculated that if the UK broadens the application of the standard 20% rate of VAT in line with the OECD average, it could generate an additional £30bn a year in revenue. 

Furthermore, adopting a regime more like that of New Zealand, which covers almost all goods and services, in theory could generate an additional £80bn a year at a lower standard rate of 15%.

At the same time, a single rate of VAT would simplify its application, providing clarity for businesses and reducing the administrative burden.

Vallance said: “The build-up to next week’s Budget has been dominated by speculation over tax rises, including VAT. But the Chancellor should use this opportunity to bring about meaningful and comprehensive reform to broaden the base and lower the rate of VAT.

“Next Wednesday should mark the start of this process with a commitment to consult on a path towards a single rate of VAT with minimal exemptions.”

Support for public finances and poorest households

The additional revenue from a broad-based VAT not only offers the government a chance to plug the gaps in the public finances but could also support those on the lowest incomes according to ICAEW.

Research into VAT simplification funded by ICAEW has found that if a standard rate of 18% was broadly applied, the poorest 40% of UK households could be fully reimbursed for the VAT they would pay.

In its call for the Chancellor to start the process of VAT reform, ICAEW reiterates that the government must also commit to mechanisms to ensure the broadening of VAT doesn’t unfairly impact low-income households and to reimburse those most affected by reforms.

It also clarifies that changes should be phased in over several years to avoid impacting inflation and the UK economy more broadly. 

Part of broader tax reforms

A consultation on broadening and simplifying VAT is just one of ICAEW’s suggested recommendations on tax reform ahead of the Budget. 

To support economic growth and reduce complexity, the institute argues that the government should also: 

• commit to e-invoicing by 2030 with a clear roadmap to real-time reporting; 
• coordinate with international initiatives; and
• improve user experience and agent capabilities. 

You can read ICAEW’s submission to Treasury in full, alongside its broader recommendations to government on how to enable growth.