Budget 2018: VAT threshold frozen, not lowered
Chancellor Philip Hammond has frozen the UK’s VAT threshold for a further two years, ending speculation there would be a drastic cut. In effect, the VAT registration and deregistration thresholds will not change for two years from 1 April 2020.
The freeze’s extension, Hammond said, would “give businesses certainty”. But that’s about as much detail as we got, with Hammond noting that the UK’s options are currently “restricted by EU law”.
Those restrictions are likely a veiled reference to a mooted sliding scale system that Hammond is said to favour. It entails freezing the threshold and then complementing it with a VAT system where businesses are eased into the VAT regime, eliminating the cliff edge effect.
But EU rules currently prohibit a gradually increasing rate of VAT the more firms earn because it wants a uniform, EU-wide VAT system.
Commenting on the idea of a sliding scale, VAT expert Neil Warren said, “I don’t really see the point.” Instead, Warren argued for freezing threshold “in perpetuity” and letting the threshold gradually lower in real terms due to inflation.
“The flat rate scheme came in at the £150,000 threshold in 2002 and it remains the same for example,” said Warren. “But in real terms its actually a 38% reduction because of the effect of inflation.”
Although the Chancellor’s two-year freeze is modest, it ends speculation that the threshold would be cut. If reports are to believed, Hammond toyed with lowering the threshold by £50,000 but ultimately pulled back.
The political furore this plan would cause likely played a significant role in Hammond changing tack.
Cutting the UK’s unusually high VAT threshold has been a controversial topic on AccountingWEB in the past. When the OTS suggested a cut to bring the UK in line with other countries’ thresholds, it drew withering criticism from the community.
VAT is infamously complex and awash with all manner of arcane rules. Even AccountingWEB’s resident VAT expert Warren has called the tax “Shark-infested waters”.
Complexity notwithstanding, the VAT threshold is also the dividing line between avoiding Making Tax Digital for VAT. Lowering the threshold would lasso thousands of small businesses into the digital tax scheme.
Beyond AccountingWEB, many Tory MPs and business lobbies kicked back against the proposal. Ultimately, it ended up as a dud as Hammond froze the £85,000 threshold for at least two years.
Visit our at a glance guide for a summary of all the major measures from Budget 2018.