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Frozen threshold pulls more within the VAT system


The stealth tax that is freezing thresholds will continue to drag more businesses into the VAT regime at a time when HMRC is struggling to cope. Jason Croke also looks at this and the other indirect tax announcements in the Spring Budget, including the government deciding against introducing an online sales tax. 

15th Mar 2023
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Not unexpected, the Chancellor confirmed in the Spring Budget that the current VAT threshold of £85,000 will be frozen for two years from April 2024. The VAT threshold hasn’t shifted since it first reached £85,000 on 1 April 2017.

Freezing the VAT threshold until 2026 means the current VAT threshold will have been kept at the same level for nine years.

The UK’s VAT registration threshold is roughly twice as high as the EU and OECD averages.

Chancellors favour fiscal drag. It avoids a headline and silently collects additional revenue for the Treasury without many noticing. The Office for Budget Responsibility has published numerous studies that indicate that freezing tax thresholds can generate substantial tax returns.

The Budget analysis indicates the levels of additional VAT revenue as follows (£m):

2022-23              2023-24               2024-25              2025-26               2026-27              2027-28

0                           0                          +310                    +370                    +375                    +420

From an SME perspective, with the cost of materials and utilities pushing up costs, businesses can only absorb so much before putting up their prices. In doing that, those businesses will reach the VAT registration threshold sooner than had the threshold moved in line with inflation.  

The inevitable outcome is that more businesses will be caught within the VAT system, which is good for the Treasury, but not so good for the business.

It also puts additional pressure on HMRC, whose systems are already creaking under the weight of its own inefficiencies. The tax department’s permanent secretary Jim Harra had previously stated to the public accounts committee that it would not see improvement for at least a further two years.

Online sales tax is off the table

Elsewhere, there had been pressure from bricks and mortar high street stores to introduce an online sales tax. This was on the basis that high street shops have additional costs such as business rates and insurance which online retailers do not suffer as much from, creating a competitive advantage for the online retailer.

The government has consulted and listened but decided not to introduce an online sales tax.

The reason behind this concerned how an online sales tax would be implemented and controlled, as well as creating unintentional consequences or unfair outcomes based on differing business models.

Not sure there are any complexity issues here. If a business can deal with VAT, and during lockdown there were varying rates of VAT applicable at any one time, then a business could easily adapt to another tax that sits alongside VAT.

Or having left the EU and able to set our own VAT rates, why not just introduce a new rate of VAT for online retailers such as a 22% VAT rate for online sellers?

However, as many businesses nowadays have both a high street and online presence, there could be complications with a shop that has different prices depending on whether you are in store or buying online. Although as an advocate of technology, there is nothing that cannot be solved with computers and appropriate software.

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Replies (6)

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the sea otter
By memyself-eye
15th Mar 2023 18:49

£85k means that most one man band businesses will avoid VAT, but the direction of travel is obvious.
Digital accounts/tax will make the process seamless (so I'm told) and will 'level up' so that all/most businesses will charge VAT. The end of cash payments will hasten the process.
Only if HMRC get their sh*t together - as our American cousins say- will this become derigeur.
Black economy anyone?

Thanks (3)
Replying to memyself-eye:
By Hugo Fair
15th Mar 2023 23:52

I know of countless local traders who will give you a 'discount for cash'.
Although I've never asked for an explanation (I'd prefer not to know), it's a bit worrying how many offer a 20% discount (instead of 16.67%)!

Thanks (5)
Danny Kent
By Viciuno
16th Mar 2023 09:30

Personally, I think anyone in business (trading with a view to a profit) should be compelled to register for VAT. Get rid of the murky off the books" or "cash in hand" nonsense. Mandate VAT receipts must be given, for everything. Then everyone will know if they are dealing with a crook. If they are getting receipts, and the trader isn't paying the VAT, then it will be all the easier for HMRC to check.

Huge public campaign highlighting that paying "cash in hand" or getting "homers" is just pushing up the tax burden for everyone else, usually those in employment as they can't avoid paying tax. Maybe a TV add of a nurse not getting paid because the government has run out of money, or something equally as obnoxious and likely to appeal to peoples apparent idea that "anyone who works for the NHS is a martyr".

If you can't afford the burden of being VAT compliant you are not really running a viable business anyway.

Thanks (2)
Replying to Viciuno:
By Open all hours
16th Mar 2023 10:27

Agree there should be a level playing field. Not the most popular view but easy to administer - a turnover tax? No reclaims, estimated payments, catch up when SA submitted. No more arguments about Jaffa cakes.

Thanks (0)
By Jason Croke
16th Mar 2023 12:14

There was a previous study into lowering (or raising) the VAT threshold and it is a game of two halves.

Make it lower (£30k) then it keeps all but the smallest traders out of the system, removes the cliff edge, more or less everyone is on level playing field, tax take increases but equally, the administrative burden increases for HMRC and for taxpayer...although the more you automate/digitise then the less the burden becomes (in theory).

Make it higher (100k), you still have a cliff edge which stops growth, your tax take goes down as fewer in the VAT system, admin burden decreased for HMRC and taxpayer, etc.

I always think VAT is a good "insight" into a business, you can file any old nonsense to Companies House, nobody checks anything except HMRC, who do check what is filed and use that to see if VAT threshold have been passed....if the threshold was set at £100k then there'd be so much more dodgy filings with less scrutiny.

HMRC seem to have much more success in assessing businesses for VAT liabilities than they do for corporation tax, which is why I always feel that VAT remains the biggest risk for most SME's because they're looking at their personal tax/dividend or CT rates and not looking at the daily transactional errors that may be happening right under their nose.

Thanks (0)
By jamiea4f
20th Mar 2023 13:55

Struggling to cope? HMRC in general is a farce, and the VAT system is the biggest joke of all. I registered a client for VAT 5 months ago and applied to join FRS at the same time. I still haven't had a response to the application and his first return is now overdue. When we call we're told "it's in progress" but won't give a date for it being not in progress. MP's should be seriously taking HMRC to task and demanding improvements or, better still, a massive overhaul.

Thanks (2)