Home News Will Philip Hammond slash the VAT threshold?

Will Philip Hammond slash the VAT threshold?

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There are 5.7m businesses in the UK, but only 2.2m are registered for Value Added Tax (VAT).

If they were all registered, and so charged VAT on their goods and services, the Treasury would be £2.1bn a year better off.

So it’s no surprise the Government is taking a look at the VAT threshold, the level of annual turnover at which businesses have to register for VAT.

This sits at £85,000 – the highest in the EU and OECD.

Philip Hammond
Philip Hammond

Chancellor Philip Hammond commissioned a report from the Office for Tax Simplification, which argues that the UK’s relatively-high VAT threshold impedes business growth by encouraging small businesses to deliberately limit their turnover to stay below the threshold. Research from Ipsos MORI suggests that 20% of unregistered businesses do this.

The report also says the system incentivises illegal undeclared cash-in-hand transactions as businesses seek to stay under the threshold.

It recommends that the Government should “examine the current approach to the level and design of the VAT threshold”.

Armed with that, Mr Hammond announced last Autumn that – instead of rising in line with inflation – the threshold would be frozen until April 2020.

In the meantime, he promised to consult on whether the design of the threshold could better incentivise growth.

Rob Johnston, Chief Executive of Cumbria Chamber of Commerce, said: “Although the Chancellor says he has no pre-determined plan to cut the threshold, that’s clearly the direction of travel. We’d be very surprised if he concludes that the threshold should stay where it is.

Rob Johnston
Rob Johnston

“This is double-edged sword for businesses.

“There are clear advantages in keeping very small businesses out of VAT, saving them an administrative burden.

“But equally, allowing some businesses to operate without charging VAT can give them an unfair advantage and can distort the market.

“Take the example of a self-employed tradesman.

“He gets his customers to buy his materials, charges only for his labour and remains under the threshold. Meanwhile, a competitor with three or four employees is registered and has to charge VAT.

“So the level of the VAT threshold has implications for businesses whether they are registered or not.”

He added: “For any business selling to other businesses, registration is often a no-brainer because it allows you to reclaim VAT on purchases while your customers can reclaim the VAT that you charge them.

“But for businesses that supply consumers, not being registered can be a real advantage. And for start-ups, not having to charge VAT in the early days can provide a stimulus that allows them to get established.

“If the Government does cut the VAT threshold, it needs to think creatively about providing other tax incentives for start-ups to make sure that we don’t inadvertently strangle businesses at birth.”

The Treasury has launched a Call for Evidence on changes to the VAT registration threshold. As part of this, businesses are invited to complete an online survey. Responses must be in by June 5.

The Call for Evidence document explores so-called “smoothing mechanisms” to ease the transition to becoming a VAT-registered business.

The Office for Tax Simplification has suggested that businesses be allowed a form of relief on their first VAT bills, decreasing over time.

Other ideas include extending the first period for which a business has to account for and pay VAT from three months to six, and applying the threshold test to taxable turnover over two years rather than one.

That would mean that, at the current threshold, a business would have to register if its turnover exceeded £170,000 over two years.

Equally, the UK could follow the example of Finland, which applies a graduated relief to small businesses. They pay no VAT at €10,000 turnover and the full rate of VAT at €22,500, with a gradually increasing rate in between.

Some countries apply different thresholds to different sectors. France and Ireland have a lower threshold for businesses that supply services, while Australia does not apply its threshold to taxi drivers.

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