A proposal to slash the VAT threshold scares many small businesses

One million small businesses face being brought into VAT if the government accepts VAT reform recommendations laid out by the Office of Tax Simplification (OTS).

The OTS report claims that our current VAT system is “awash with layers of complexity” and recommends drastically lowering the VAT threshold from its current level of £85,000 (one of the highest in the world). While it doesn’t make an outright recommendation, it does look at the consequences of lowering the threshold to a level that is closer to £26,000 – the national average wage.

The result of this would be to bring around one million extra businesses into the VAT fold, and “make it harder for businesses that wish to illegally evade VAT to remain undiscovered.”

A lower threshold would also escalate Making Tax Digital (MTD)’s return as an immediate concern for small businesses, as many would also face increased administrative costs to obtain the relevant software needed to submit returns to HMRC.

HMRC’s already stretched workload would increase drastically too, with an estimated one million new VAT applications.

Discussion has taken place on how the government would potentially go about introducing the radical lowering of the VAT threshold. Suggestions include bringing it down by £10,000 every year for five years, or lowering the threshold gradually. There would obviously be pros and cons with each option.

If the threshold was to be lowered, Britain’s small businesses would also become closely acquainted with – what’s been described as – ‘VAT’s shark infested waters.’

The report discusses specific technical areas, such as the partial exemption regime, the capital goods scheme, the option to tax and other special schemes.

Even chocolate ‘goods’ are affected by the UK’s quirky tax classifications. AccountingWEB quotes the famous example of the VAT argument around Jaffa Cakes. After an epic court battle they are classified as a cake, not a chocolate-covered biscuit, so are zero-rated. These complexities extend further… A gingerbread man with chocolate eyes is zero-rated, but if he wears chocolate trousers it is standard rated!

If small businesses are brought into the VAT system, all of this will need to be ironed out, said the OTS’s tax director. Business will require “better and more accessible guidance” and “a less uncertain penalty system.”

“The report presents an opportunity to start addressing the many anomalies of VAT,” said the chairperson of the OTS Board. “For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”

While this is just at the stage of early discussion and, as yet, very unclear, if you have concerns over any aspect of your VAT you can be assured that our VAT team are completely up-to-date with all current VAT rules and regulations. Call us for advice on 020 8530 0720 or email svetla@nordens.co.uk.

This article is adapted from AccountingWeb.