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Paper boat chained to weight AccountingWEB Small businesses sink in VATs anchored hold
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Businesses sink as VAT threshold restricts growth

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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. 

5th Dec 2023
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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.

Replies (11)

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By Open all hours
06th Dec 2023 08:38

A ridiculously low threshold but then it’s a ridiculously tedious tax. The novel amusement of chocolate content on biscuits is wearing very thin.

Thanks (1)
Tornado
By Tornado
06th Dec 2023 11:22

The Solution to this problem is simplicity itself ... the Government need to raise the limit to a more beneficial level for smaller businesses.

Why freeze it in the first place?

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By FactChecker
06th Dec 2023 14:01

So DN thinks the threshold should be reduced to as little as £20,000 per annum .. in order to be able to reduce the rate to 17% ?

Leaving aside the fact that the govt is unlikely to reduce the rate of one of its greatest cash cows - this equates to telling SMEs to subsidise larger businesses.

I'm beginning to see why Justin questions DN's judgement so often.

Thanks (3)
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By I Can Help Your Business
07th Dec 2023 09:41

This article highlights the lack of knowledge, even from 'professionals', about the implication of VAT on a (small) business

It also highlights the narrow minded views and approaches that some small business owners have in relation to breaking the VAT barrier.

Having helped hundreds of small businesses develop and grow over the past few years, this issue comes up regularly and when the the reality of VAT is explained and the real implication to business are explained, for most, it is a lightbulb moment.

Here's a revolutionary idea - make all businesses register for VAT (or drastically reduce the threshold)!

Thanks (1)
Replying to I Can Help Your Business:
Tornado
By Tornado
07th Dec 2023 10:32

I do strongly disagree with most of your comments and I have been in this business for over 5o years.

Some previous Governments have better understood the way that small businesses work and grow more than recent Governments do, mainly by allowing new ideas and talents to develop with the minimum amount of State intervention and needless bureaucracy. I am fed up with telling people with good ideas and talents more about what they cannot do than what they can do, stifling much of the enthusiasm that should be allowed to develop freely.

Making everyone register for VAT, even on small turnovers of a few thousands of pounds is a ridiculous notion and helps no one other that those that will charge for their services to deal with this and other pointless bureaucracy.

Margaret Thatcher wanted to raise the VAT registration limit to a high level as she recognised how much it would help small businesses, but was only able to take it to a certain level due to EU regulations. Now that we are out of the EU we can set our own limits and, in my opinion, it would be a tremendous boost to our economy to set the registration limit at a minimum of £100,000 or higher and be Index Linked again.

This arrogant notion that infests Government these days where there is a feeling that if they can deal with Accounting Software, for example, then everyone can is disgraceful. Everyone has a talent of some sort but it does not mean that they are good at everything. Help is needed to grow and nurture talent in the way that is best for individuals and not as dictated by the State who show a woeful lack of understanding how small businesses really work and what they really need to succeed.

Thanks (3)
Replying to Tornado:
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By I Can Help Your Business
07th Dec 2023 11:05

I am not an accountant but have run/currently run several businesses and, in the past 10+ years, personally helped/advised probably 1k+ businesses.

The lack of understanding of VAT and its implications is not necessarily accountants fault, but, normally, accountants are not business advisors, so offer focused advice (although this has been changing over the past few years where some are becoming more business savvy or work with advisors like me to offer a wider range of services). Starting and growing a business for most people is a minefield because they either do not think about or care about all of the things that need to be done outside of 'doing their thing'.

It all starts with entrepreneurs' understanding of VAT - 'oh, I can just claim VAT back' is such a common statement, it hurts me!

When you explain that they will not have to put their prices up by 20% after registering, many just don't get it until it is explained that they are paying HMRC the difference between VAT collected and VAT paid out. For a low margin business, it will be a smaller %, for a higher margin business, it is a higher %.

Trying to explain to people that they will not crack B2B markets until they register because many corporates will still not work with non VAT registered businesses - I have seen on several occasions small businesses turnover double/treble (over registration limits) because registering for VAT opened them up to new markets & opportunities.

I am the biggest supporter of startups and SMEs, but sometimes they are their own worst enemies!

BTW, I am also happy to argue that the VAT registration limit goes up to, say £100k, but, for a successful business, all you are doing is delaying this discussion!

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Replying to I Can Help Your Business:
Tornado
By Tornado
07th Dec 2023 11:53

normally, accountants are not business advisors

I find this to be a strange statement to make as that is generally just what we are. Unless I am missing something about modern Accountants, our role is to help people start up and run their businesses with a long term relationship in mind. Indeed, this firm has several clients or their successors, who have been with us for over 50 years, many now with substantial sized businesses who started from very humble beginnings.

It is, or should be the role of an Accountant, to advise and support clients as their businesses grow.

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Replying to Tornado:
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By I Can Help Your Business
07th Dec 2023 12:13

It is changing and more accountants are becoming advisors, but, in reality, the advice is limited to/around the financing.

How many accountants really know about:
Selling
Marketing
Social Media
Manufacturing
Exporting
Importing
etc.

Yes, they may have experience via their clients, but it is unlikely they have an in depth knowledge of these. Those that do are a very rare breed.

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Replying to I Can Help Your Business:
Tornado
By Tornado
07th Dec 2023 12:42

Can I ask in what capacity you have advised 1k+ businesses?

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Replying to Tornado:
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By I Can Help Your Business
07th Dec 2023 13:02

I have been helping businesses startup and grow for over 10 years, after a corporate life (top 300 PLC director) and extensive experience in sales, marketing, product & brand development, sourcing, import/export. I have started several businesses, some successful, some failed; sold a few, closed a few down and currently own 5.

For the past 7 years I have been a local business advisor for my council, helping circa 100 new businesses on a 1:1 basis per year (a lot more during lockdown). I also have/had many direct relationships with early stage companies.

If you include the people who I have helped indirectly through a business community project I co started a few years ago, the figure would be several thousand, but I don't count them!

My main goal is to help people not make the mistakes too many other startups and small businesses make (and I have). Almost all of my knowledge is based on experience, from registering a business to building my own servers/creating a hosting business, building a brand from nothing to £20m turnover in 18 months or sourcing over $1bn of TV's (a lot more if you include audio) for the UK market, reinvigorating an old brand to become the UKs best selling products.

I probably could do with more experience in some sectors, like social media!

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By GrayMan
07th Dec 2023 10:03

Quite a few plumbers, small builders, tilers, and other businesses I know of, instruct their customers to order the materials, skips, machinery, etc (I suspect some may place the orders themselves) and have their customers pay the supplier directly. While this means they don’t make a profit on the materials it avoids inflating their sales needlessly. Most say this has worked very well for them and is perfectly legal.

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