The Low Incomes Tax Reform Group (LITRG) has sounded a note of caution on any reduction of the VAT threshold in the near future.
There are so many fundamental changes on the horizon for small businesses to get to grips with in the next few years, such as Brexit and HMRC’s Making Tax Digital programme, that LITRG strongly urges caution from the Government when considering introducing any further substantial changes to the business landscape, such as a reduction in the current VAT registration turnover threshold of £85,000. This will simply add further complexity and burdens on business, LITRG says.
LITRG outlined its concerns in response to a Treasury call for evidence on the VAT registration threshold and how it could better incentivise the growth of businesses. The Office of Tax Simplification (OTS) in its review of VAT published last year recommended that the Government examine the current level of the VAT registration threshold. Businesses with turnover below the VAT threshold are exempt from VAT.
LITRG Chair Anne Fairpo said:
“As VAT is based on a business’ turnover and not its profits, very many small businesses with low profits still find themselves having to deal with VAT on a day to day basis.
“We are hugely concerned that any lowering of the VAT threshold at this time could threaten seriously a small business’ ability to remain competitive in its marketplace if its trade is mainly with non-VAT registered customers.1
“Lowering the registration threshold should only be considered if a smoothing mechanism can be incorporated into the VAT system to ease the tax cost and competition issues on crossing the threshold. Ideally, this should be in tandem with simpler VAT accounting and compliance requirements so that the additional administration a business must carry out on a day-to-day basis when it becomes VAT registered does not become too burdensome.
“We strongly believe that the prospect of a small business becoming a VAT registered trader is a daunting one for many and so may have the impact of stunting growth for some businesses. But if the threshold is set too low, this may entice some smaller businesses which might otherwise be compliant into the hidden economy.2 This is due to the overwhelming burden that they perceive VAT compliance to be and because they do not feel they can be competitive in their industry if they have to charge VAT."
1. If the business’ customers are VAT registered themselves then they reclaim any VAT charged to them as input VAT when they do their own VAT returns, so there is no additional cost to them if VAT is added to the cost of purchases. If the business’ customers are not VAT registered themselves, this is not the case. Therefore, when transacting with a non-VAT registered business, a newly VAT registered business has to decide whether to charge the higher price to include the additional VAT (which may make them uncompetitive) or charge the same price and pay the VAT due from their own profit on the transaction (which will make the business less profitable).
From the effective date of registration you must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep VAT records and a VAT account
You can also reclaim the VAT you’ve paid on certain purchases made before you registered.
2. Hidden economy refers to individuals or businesses that do not declare some or all of their income to HMRC. An October 2017 report by NatCen Social Research for HMRC found that the highest prevalence of Hidden Economy participation was found among those In low income households.