Earlier this week The Office for Tax Simplification (OTS) published its review of VAT – the first of its kind since the introduction of VAT over forty years ago.
The review will come before VAT is due to go digital in 2019, as part of HM Revenue & Customs’ (HMRC) ‘Making Tax Digital’ scheme. Under the scheme, all businesses will have to report VAT digitally using cloud accounting software.
The review of VAT – which raises around £120 billion each year – looks at many of the complexities and burdens of the VAT system; one such matter is the potential impact of either raising or lowering the VAT registration threshold. Currently, businesses with a taxable turnover of under £85,000 are not liable to registration, but there is speculation the threshold will be lowered to companies with a turnover of up to £43,000; this could see up to 600,000 small businesses being affected and brought within the VAT net.
There are four potential options being tabled:
- Lower the VAT threshold so that it is nearer to the general European thresholds which currently sit at around £45,000. While this figure is still relatively high, the feeling was that in time UK businesses would accept the idea, as it was in line with counterparts and it would remove any anti- competition issues.
- Leave the threshold where it is.
- Leave the threshold where it is, but have a smoothing or transition period for businesses newly liable to registration, to ease the burden in the first year or so.
- Significantly increase the threshold to say £250,000 or even £500,000 and take most small businesses out of the regime; the threshold is then at a level that is unlikely to ‘stunt growth’, but would significantly reduce the administration and cost burden for the large majority of smaller businesses.
In terms of the threshold, the OTS warns of a significant disadvantage for largely labour-based sole proprietors who hover above it, compared to those not registered. A registered plumber, for example, could be forced to charge 20 per cent more in VAT decreasing his or her competiveness. It said this disadvantage can stifle expansion by not taking on an extra employee or stopping work for a period of time solely to avoid hitting the VAT threshold. It warned that it can also lead to illegal practices, such as supressing income.
Simon Anslow, VAT Partner of PKF Francis Clark said: “There is a view that the current threshold level is stunting overall small business growth and it appears some businesses are deliberately restricting trade to stay beneath the level. This in turn is leading to resentment from those businesses that are VAT registered, who believe that they are being commercially disadvantaged by those who are not registered and not charging VAT.
“It will be interesting to see which option the Chancellor opts for with small businesses already under pressure gearing up for Making Tax Digital plans and the changes that Brexit will bring”.