HMRC report looks over the VAT cliff edge

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Hot on the heels of the OTS VAT simplification report, HMRC has published the findings from Ipsos MORI research into business behaviours and experiences associated with VAT registration.

It definitely seems - with a Budget looming - that VAT is a topic du jour in Whitehall. The OTS report created tremors last week when it suggested substantially lowering the VAT threshold could alleviate the problem of businesses clustering just beneath the threshold: the so-called ‘cliff edge’.

The HMRC/Ipsos Mori report, however, is more of a barometer, taking a look at the behavioural motivations behind business's attitude to VAT. The emphasis on behaviour is in line with HMRC’s penchant for behavioural sciences (specifically nudge theory).

Around one in ten registered businesses (11%) specifically mentioned increased costs, usually increased accountant bills.

Most respondents knew about quarterly returns, record keeping requirements and the existence of the threshold. But other findings expose a more murky understanding of the tax. For instance, while most knew about the threshold, only 28% were able to say exactly what the figure was. Around a quarter didn’t know that businesses could reclaim VAT.

The greatest uncertainty was about whether VAT is only due once an invoice is issued, and if customers based overseas need to be charged VAT.

Unsurprisingly, companies still seem to overwhelmingly rely on their accountant for help on these issues: 67% of registered businesses got information from an accountant when deciding to register and 57% of unregistered borderline businesses have sought information on VAT from an accountant.

The most common reason for voluntary registration was simply precaution.

In the information race, HMRC guidance sits in a distant second place (14% of VAT-registered businesses and 11% of unregistered borderline businesses). While most businesses in the report found the advice useful, the report found businesses’ experience with the helpline was “more mixed”.

The most common reason for voluntary registration, according to the research, was simply precaution. The registering business expected to grow and did not want to risk being in breach of regulations. Agent advice and the ability to reclaim VAT were also primary factors.

The majority of businesses registering for VAT found the extra costs of administration, and not the administrative burden itself, to be the primary drawback. Around one in ten businesses (11%) specifically mentioned the increased cost of undertaking extra administration as one of the main disadvantages of being registered; 78% said they had incurred costs, usually increased accountant bills.

Interestingly, the HMRC report zeroes in on how businesses restrict their turnover in several different ways (sometimes illegally) to avoid going above the VAT registration threshold.

The most common tactic reported is closing the business or stopping advertising (47% of those restricting turnover admitted this). Refusing or turning down work (21%), asking customers to purchase materials (16%), and reducing prices of products were also popular. Some respondents split their businesses by operating as a separate legal entity or artificially separated the business by product or service (both 10%).

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About Francois Badenhorst

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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By Eric T
22nd Nov 2017 10:55

I've always thought that the very high UK VAT registration threshold acts as a serious brake on businesses that would otherwise be inclined to expand and grow.

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