Share this content
Heavy weight

VAT threshold cut proposal stokes MTD fears for small businesses

7th Nov 2017
Share this content

One million British small businesses face being brought into VAT if the government accepts the Office of Tax Simplification’s VAT reform recommendations.

The OTS report, published today, suggests numerous changes to a VAT system “awash with layers of complexity”. The blockbuster recommendation is to drastically lower the VAT threshold from its current level of £85,000 (one of the highest in the world).

The report doesn’t make an outright recommendation, but it does ponder the consequences of lowering the threshold to a level that is close to or below the national average wage (£26,000).

This would bring around one million extra businesses into the VAT fold, and “make it harder for businesses that wish to illegally evade VAT to remain undiscovered”.

A lower threshold would also herald MTD’s return as a relatively immediate concern for small businesses. The OTS report admits: “Many small businesses would also face increased administrative costs”, since “a lower threshold would result in a greater number of businesses being mandated and required to obtain relevant software to submit returns to HMRC”.

The burden on an already stretched HMRC would be pretty severe, too. “HMRC would suddenly have a million new VAT applications,” said Neil Warren, an independent VAT expert. “It would probably take them a year to work through it.”

How the government would potentially go about introducing the radical lowering of the VAT threshold is another burning issue. According to Warren, there are a couple of approaches.

“They could bring it down by £10,000 every year for five years, for example,” said Warren. But this would only move the “cliff edge” the OTS identifies in its report, where many growing businesses deliberately avoid expanding beyond the VAT threshold.

It results in a “very visible bunching of businesses just before the VAT threshold, and an equally large drop in the number of businesses with turnovers just above the threshold,” the OTS wrote.

Lowering the threshold gradually, Warren said, could exacerbate this issue further. “You’re creating a different figure on the cliff edge. Sometimes the bold measures are the best ones”.

If the threshold was to be lowered, Britain’s small businesses would also become closely acquainted with VAT’s byzantine, sometimes arcane rules: as Warren puts it, “shark infested waters”.

AccountingWEB readers may be familiar, for instance, with the VAT intricacy around Jaffa Cakes. After an epic court battle they are classified as a cake, not a chocolate-covered biscuit, so are zero-rated.

The VAT system is riddled with these sorts of taxonomic gymnastics: a gingerbread man with chocolate eyes is zero-rated, but if it has chocolate trousers it is standard rated.

If small businesses are brought into the VAT system, all of this will need to be ironed out, said the OTS’s tax director Paul Morton. The OTS report says business will require “better and more accessible guidance” and “a less uncertain penalty system”.

And the report zeroes in on specific areas of technical difficulty, including: the partial exemption regime, the capital goods scheme, the option to tax and other special schemes.

“This report presents an opportunity to start addressing the many anomalies of VAT,” said Angela Knight, chair of the OTS Board. “The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced.

“For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”

Replies (62)

Please login or register to join the discussion.

By Ruth Corkin
09th Nov 2017 18:14

I am amazed that the message that has been taken away from the report is that the OTS is recommending that the VAT threshold is to be lowered. That is not what the recommendation was at all. It has recommended that the threshold is looked at because of the issues around "bunching" and the cliff edge. Deciding to close or turn down extra contracts in order to avoid registering for VAT has been shown to stifle growth and productivity. This in turn is linked to less funds available for the NHS, education etc.

No value for the threshold was recommended in either direction. In fact during the research it was acknowledged that bringing the threshold down too low (eg to the national minimum wage) would have diminishing returns for the tax take, would increase the admin burden adversely on both taxpayer or HMRC and could potentially catch those that do a small amount of activity as a hobby.

Various methods for easing the cliff edge when having to register for VAT have been considered and are in the report and could apply wherever the future level of the threshold may be.
As "one of those people who are detached from reality", I can say that the report and recommendations were carefully researched and went through a number of interested parties for comment, including Mr Warren!
Yes it is true that more businesses would be caught by MTD if the registration threshold was lowered, but there may be exemptions put in place to protect these businesses on the basis that the original MTD threshold was based on the old VAT threshold.who knows?

I am surprised at the comments on this site - I would expect if of certain national newspapers.

Thanks (3)
Replying to Ruth Corkin:
By Ken Howard
10th Nov 2017 09:44

Ruth Corkin wrote:
(eg to the national minimum wage)

Why even think about NMW when considering VAT threshold? It has no relevance whatsoever. VAT is based on turnover not profit, so it's comparing apples against sports cars. Do the OTS not even understand that a business with turnover of over £85k could have a "profit" of less than NMW??

Thanks (1)
Replying to Ruth Corkin:
By Peter Cane
10th Nov 2017 10:38

Maybe I've watched Yes Minister and Yes Prime Minister too many times, but the cynic in me might see the following.
HMRC's initial consultation on MTD suggested introducing it for businesses with turnover of more than £10,000 and they promptly got their fingers burnt with the professional and political outcry, leading them to reconsider. Now why not put it at the VAT threshold? Someone says. Good idea say the HMRC mandarins, even better if we can then get the VAT registration threshold reduced.
Along comes OTS recommendation 1 which suggests consideration should be given to changing the threshold with some form of smoothing mechanism. Wonderful, we'll put feelers out for the NMW level, but if that doesn't work, let's go for say £43,000 (OTS report page 9).

Thanks (0)
Replying to Ruth Corkin:
By johnjenkins
10th Nov 2017 13:11

Ruth, wouldn't the OTS be better off advocating the demise of multiple returns for the small business if MTD comes to fruition, than even considering the work methods of those who you deem to be stifling growth and productivity?

Thanks (0)
Replying to Ruth Corkin:
paddle steamer
10th Nov 2017 14:43

Ruth Corkin wrote:

Various methods for easing the cliff edge when having to register for VAT have been considered and are in the report and could apply wherever the future level of the threshold may be.

How many of them could honestly have the word "simplification" applied.

Either there is a cliff edge at some level (whatever that level is) or there is transitioning which has to be understood by small business (they have difficulty enough with 12 month rolling turnover) and adds complexity.

Give one example that changes threshold, has no cliff edge and no added complexity.

Of course if one makes the cliff edge low enough small business will be forced to just deal with it, if it is set so low (hence minimum wage reference) that for the self employed to live they will need to register or hide sales that likely gives the Treasury desired outcome.

Hence why the likely outcome will be a drop in threshold, in effect a big stick to drive the donkeys over the threshold.

Thanks (0)
Replying to Ruth Corkin:
By C.Y.Nical
10th Nov 2017 23:22

Interesting:- 'As "one of those people who are detached from reality", I can say....'
If that means what I think it means then we have someone from the OTS reading this thread. Good.
I take the point that most of us have read a report in the media about this, and some of us have had a quick look at the report itself, but quite possibly none of us have read the whole thing, line by line. Sorry about that. We have been too busy trying to read and understand each year's Finance Act and the UK tax code which now extends, I am told, to 23,000 pages.
I don't know what you guys and gals at the OTS actually do all day but you definitely are not simplifying tax. It's freaking obvious that you have totally failed to do that. I echo this other comment:
'However, given the OTS's track record in convincing government to simplify things I suspect this will be carefully looked at and nothing will be significantly changed!'

Thanks (1)
By nickygl
10th Nov 2017 09:03

Another anti-prosperity idea. Adding another layer of complexity to a new business and pushing them into VAT at such a low level means that they have to spend even more time on business administration rather than growing their business. Leave the threshold where it is, and concentrate on truly simplifying the VAT rules. As a country we need to be encouraging entrepreneurship as that is how we will get through the uncertainty of Brexit and other economic challenges.

Thanks (0)
By andrew1211
10th Nov 2017 09:29

Will never happen...the end

Thanks (0)
By whelmic
11th Nov 2017 10:30

I would be in favour of lowering the threshold right down to £10k to create a fair playing field. My turnover is just above the current threshold and I am fed up of continually being undercut by competitors who are deliberately keeping their turnover just below the threshold to avoid registering for VAT

Thanks (0)
By rockallj
12th Nov 2017 18:36

Can anyone please explain to me how the OTS, Office for SIMPLIFICATION thinks? How can pushing micro businesses into the VAT threshold and the arms of MTDfB be a simplification?

Thanks (0)
Replying to rockallj:
By Tornado
12th Nov 2017 19:17

I suppose it depends on who the OTS is simplifying tax for. The more work we do, the less done by the Government so making tax simpler for Government might be the reason for the OTS to exist.

Thanks (1)
By Smokoe Joe
17th Nov 2017 11:03

The point is, a turnover of £85k isn't "pay" of £85k.

A business turning over £85k would be making the owner a profit of around the national average pay so in my view is right.

A sole trader working on his own should not need to be VAT registered,only if they have employees or sub-contractors working for them.

Do the OTS not realise sales does not equal profit.

A good point made about the threshold and people closing up to avoid tipping it.

Some businesses cannot add VAT, they are too price sensitive. I have a B&B business client touching the threshold. They cannot put 20% on room prices, they would have 0% occupancy. If their gross turnover went from £80k to £90k they would have to register and actual turnover would drop to £75k. Makes it very hard as it is seasonal, so if they have a bumper summer they have to turn people away from empty rooms off season!

The only really fair solution is to have a £0 or very low (say £1000) threshold - all businesses must charge VAT.

In the past this would have been problematic, but I think with modern cloud bookkeeping systems this outcome has quite a high probability.

Thanks (0)