The window on the government's VAT threshold consultation has slammed shut, with several high-profile submissions warning that any reduction could be detrimental to small businesses.
The Institute of Independent Professionals and the Self-Employed (IPSE) has thrown its hat into the VAT ring, calling on the Chancellor to increase the threshold in its official submission to the government’s VAT call for evidence.
IPSE said a raised threshold would “stimulate small business growth and encourage innovation”. The body was also the latest group to attack any notion of decreasing the UK’s £85,000 VAT threshold (one of the highest in the world).
The consultation was announced by Philip Hammond during the 2018 Spring Statement. Hammond froze the threshold for two years until April 2020 while the decision is made. He did, however, acknowledge concerns over the ‘VAT cliff edge’ and businesses deliberately stifling growth to avoid the VAT regime.
The Chancellor initiated a consultation on the VAT threshold, and the call for evidence period ended yesterday on June 5.
The Office for Tax Simplification (OTS) sparked a furious debate on AccountingWEB last year when it pondered the consequences of drastically lowering the VAT threshold to around the UK’s national average wage (£26,000).
The suggestion drew substantial criticism, and now IPSE wants to take it one step further: advocating for a VAT threshold increase and subsequent annual increases to the threshold each year in line with RPI. This was the government’s policy from 1980 until 2017 when such increases were frozen.
“Increasing the VAT threshold in line with RPI would provide businesses with much-needed certainty as our imminent withdrawal from the EU approaches," said Andy Chamberlain, IPSE’s deputy director of policy. "Presently, the self-employed contribute £271 billion to the UK economy every year – that’s enough to fund the NHS, twice. Increasing the VAT threshold would create a nurturing environment in which our smallest businesses can continue to thrive and expand."
Smooth the impact on businesses
The Association of Accounting Technicians has also delivered its take on VAT threshold debate. The AAT agreed that it is “common for small businesses to manage their turnover to stay below the VAT threshold”, but it warned against considering VAT “in isolation” when it comes to business growth and productivity in the UK.
“The broader tax and regulatory landscape should be considered,” the AAT said. “We believe that the most appropriate way to address concerns that the current VAT threshold distorts taxpayer behaviour is to smooth the impact on businesses of crossing the threshold for the first time.
“Although reducing the VAT threshold may appear to be a simpler solution, it would result in unwelcome added costs and burdens for small businesses who suddenly find themselves above the VAT threshold, as well as adding to the tax burden on households in the form of additional VAT.”
The most common methods of managing turnover, according to a survey of AAT members, were: turning down work (73%), asking customers to purchase raw materials and/or supplies (63%), closing the business for a season or period (39%), restricting opening hours (35%), and splitting up the business (32%).
The AAT’s response concluded that it should "not be assumed" that in the absence of this behaviour those businesses would grow significantly. “Many small businesses have no intention of growing into large companies, and are merely set up to provide their owners with sufficient income to support them and their families.”
Instead, the AAT said it favoured more nuanced smoothing mechanisms like an extension of the FRS. “It may be possible to, for example, expand this scheme by introducing lower FRS rates for small businesses who are just over the threshold, or only making domestic sales (subject of course to State Aid issues).”
What do you think? Should the threshold be lowered or raised? Or should we just stop fiddling with it?
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.