VAT Threshold Changes – A good thing?...

It may have escaped your notice – a lot of these consultations don’t get the promotion I think they should, especially when it can affect so many people/businesses – but the Government carried out a consultation in 2018, on a proposed reduction of the VAT threshold.

It is rumoured that the Chancellor was talked out of a unilateral decision to change the threshold in the Autumn budget 2017, by business groups like the CBI and FSB, with a consultation on a reduction the compromise. The cynics out there may suggest that this is merely delaying the inevitable, but consult they did and we now await the formal outcome.

At present the VAT threshold increases annually in line with RPI and currently sits at £85,000. This is the limit of taxable turnover a business can bring in before having to register for VAT. The proposal under consultation was to either freeze the threshold, as has now happened in the budget, or to reduce it significantly, to somewhere in the region of £20,000-40,000. The Chancellor is of the belief that at its current level the threshold is creating an arbitrary ceiling that stops businesses from going for growth. I have also experienced this with some businesses, where they would rather turn business down or delay carrying it out rather than go over the VAT threshold. By reducing the threshold to £20,000, the Chancellor would bring nearly every ‘proper’ business into the VAT net, raising up to £2 billion in extra tax revenue annually.

I say proper, not to do a disservice to those beneath that level, but to separate them from businesses generating income from regular trade as opposed to businesses that are run by individuals as a part-time hobby. If your revenue is less than £20,000 over a 12 month period, then in my view, that business is not likely to be able to support you to live off its income.

The argument of the business groups was that a reduction to the levels proposed would more likely drive people out of business rather than support growth. I tend to disagree with this view and I have several clients on either side of the threshold.

In my opinion, a reduction to £20,000 would have a levelling effect and would mean everyone competes on the same basis, both financially and with the administration of the tax system. It also removes the opportunity for cash transactions as with the introduction of Making Tax Digital (MTD) for VAT coming into force in April 2019, all business will have to report their taxable income to HMRC digitally, direct from their accounting systems. If everyone must charge VAT, and everyone must pay VAT, then there can be no competitive edge because of tax – we will all compete purely on service and pricing of goods and/or services.

The effect of a reduction in the threshold will not be as great on each business as most fear by becoming VAT registered. Yes you have to charge the VAT onto your customers, and in the case of selling to private individuals this does create an added cost, but the chances are your pricing is already slightly higher as a result of VAT anyway. In procuring any goods and services to deliver the job and or run your business, you will have paid VAT and in order to recover those costs, you, in turn, increase your sales price, ever so slightly.

You may be right to argue that I have a vested interest – helping small businesses with their accounts and VAT returns – but personal considerations aside, I have to say I would support the reduction and think that it would ultimately be a good thing over the long term.

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