Businesses sink as VAT threshold restricts growthby
Businesses find themselves anchored by the VAT threshold, deliberately preventing growth so they don’t have to increase prices, while those that do surpass the threshold are struggling to keep afloat.
October’s monthly insolvency statistics showed an 18% increase in comparison to October 2022 and as businesses continue to struggle, the Any Answers community identified the VAT threshold as a contributing factor.
AccountingWEB member Caber Feidh discussed how crossing the threshold would jeopardise a family-owned tearoom.
“I sometimes visit a small family-owned tearoom whose business model is threatened by its turnover approaching the VAT-registration threshold. Adding VAT to their prices would make them uncompetitive and the only alternative they can see is taking longer holidays,” Caber Feidh wrote.
In another post, helencymru addressed their struggle witnessing clients face closure after reaching the VAT threshold. “Does anyone else feel like they’re failing their small business clients as they watch more and more go under after hitting the VAT threshold?” They added: “It’s destroying all of the limited joy I get from my job nowadays.”
Sail beyond the VAT horizon
The community advised Caber Feidh and the family-owned tea room, encouraging them to surpass the VAT threshold.
Regular commenter Tax Dragon wrote, “The solution is to aim big, not to try to stay small.”
Paul.benny agreed replying, “Ultimately, though, I think it’s a mistake trying to stay below the VAT-registration threshold. That threshold has remained at £85,000 for some time, while we’ve had double-digit inflation on food prices and other costs.”
In helencymru’s post, some people felt that the threshold was not a factor in contributing to insolvencies and so businesses should not limit their growth. Members JB101 and williams lester accountants, both shared that they had never seen a company face closure immediately after reaching the threshold.
Another AWEB commenter, Viciuno felt that the threshold needs to be lowered: “Then nearly every business would be VAT registered, which is how it should be. Puts everyone on the same playing field. VAT registration needn’t be difficult or burdensome for the vast majority of traders.”
Others shared that the issue lies with the fact that most businesses are teetering on the edge of the £85,000 limit. Seonaid Anderson wrote, “I have a couple of clients dancing around the VAT limit. It is soul destroying and not sustainable for them to keep cutting hours and so on to stay below.”
AccountingWEB regular I’msorryIhaven’taclue replied, “My input to any client who cared to take notice would be to jump either side of the fence but not to sit on it, in no man’s land.”
The endless voyage
Despite the rumours in the lead-up to the Autumn Statement, the threshold remained at £85,000 – exactly as it’s been since April 2017.
Dan Neidle, the founder of Tax Policy Associates, has long been vocal in his criticism of the stagnant threshold. On a recent episode of No Accounting for Taste, Neidle shared how the VAT threshold is a barrier to economic growth as small businesses deliberately try to stay below it.
“If you’re a coffee shop making £84,000 and you suddenly make £85,000, you have to add VAT making it 15–20% more expensive and you will be out-competed by your neighbour who is below the threshold and isn’t charging VAT,” he said.
Neidle also used his registration threshold chart, to show the massive cliff edge of companies who are deliberately holding back their growth potential.
This chart, which shows the number of businesses at each turnover level in 2018/19, suggests that around 26,000 businesses are remaining stagnant.
He suggested: “The most obvious way of fixing it, and I don’t pretend it’s politically easy, would be to phase down that threshold and aim to take it to £20,000–30,000 a year.”
He proposed that the revenue generated from this change could then be used to lower the standard VAT rate. “It’s plausible you could reduce the rate to something like 17%,” he said. This strategy would lessen the financial burden on businesses affected by VAT, reducing the cliff edge and promoting economic growth.
“The idea that the tax system makes companies hold back their growth is bananas,” Neidle concluded.
What are your thoughts on the VAT threshold? Would you advise businesses to stay below or surpass the threshold? Let us know in the comments below.