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Westminster in Spring

Spring Statement 2018: New VAT threshold consultation blooms

13th Mar 2018
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In an otherwise muted Spring Statement, the Chancellor has once again flagged up the troublesome issue of the VAT threshold.

An Office of Tax Simplification report last year set AccountingWEB ablaze as it toyed with the idea of drastically cutting the UK’s VAT threshold. The OTS report tussled with what it saw as “bunching”, where small businesses deliberately limit their turnover to remain below the threshold.

The OTS estimated that reducing the VAT threshold to £25,000 would raise the Treasury up to £2bn, and affect up to 1.5m businesses. But this suggestion was quickly cast asunder by the Chancellor in last year’s Budget speech.

Philip Hammond acknowledged the OTS report’s findings, but said he was “not minded to reduce the threshold” and froze it at £85,000 until April 2020. Instead, he promised to look at how VAT’s design could better incentivise growth.

Small businesses below the threshold currently have a strong incentive not go above it. The price competition from smaller rivals - who don’t have to charge VAT - mean they often have to absorb the cost of VAT, squeezing their profit margins.

Besides the blockbuster proposal of cutting the threshold, the OTS report mooted a tapering arrangement where companies can be dovetailed into the levy, rather than suddenly being slapped with a VAT bill. So businesses with a turnover between £85,000 and £115,000 would be allowed to recoup some of their tax bill.

The familiar, if ill-defined, outline of Making Tax Digital for VAT also makes an appearance in the call for evidence. From April 2019, MTD for VAT will become mandatory for businesses with a turnover above the VAT registration threshold.

As we’ve noted elsewhere on AccountingWEB, this will require the use of MTD-compliant software to submit their VAT returns. This has caused considerable anxiety for many members, especially businesses which use larger systems that can’t suddenly change.

The government has now acknowledged that “in the short term, until MTD is embedded, MTD could add to the bunching effect highlighted earlier”. But in the longer term, the paper added, MTD could “pave the way to further reforms and simplifications of the VAT system and administrative burden reductions, for example when combined with direct taxes”.

Whatever your feelings on the matter, the consultation is now open. The deadline for responses is 5 June 2018. You can email your responses to this call for evidence to the email address va[email protected] or you can complete complete this SurveyMonkey online questionnaire.

Replies (4)

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By johnjenkins
15th Mar 2018 09:48

There is only one answer to stop all the "cliffhanger" approaches and that is to register all business for VAT. Level playing field. MTD stipulates that all business under the current threshold will have to do quarterly figures so this will be a good time to ease business in over a period of say 5 - 10 years. By then the software should be a lot easier to use and broadband should be up and running everywhere.
If you start tinkering then it will all go to pot.

Thanks (3)
Peter Hall
By peter__hall
15th Mar 2018 10:09

Australia has a threshhold equivalent of about £40,000, with a rate of 10%.

If the UK Government reduces the threshhold here, will the rate reduce also ?

(Just joking of course)

Thanks (0)
By cfield
15th Mar 2018 11:24

Surely Brexit affords us a great opportunity to do away with VAT altogether and bring in something more sensible such as a purchase tax with a registration threshold based on margins rather than turnover. This would take a lot of firms with high materials costs out of scope.

This could be combined with the tapering approach already mooted, which should be brought in from a much lower threshold (say £25,000) with an initial rate of 5%.

They could also beef up the business splitting rules so firms with organisational links would be treated as the same business without having to prove financial and economic links too. This would stop some firms gaining an unfair competitive edge over others.

This would reduce the cliff edge effect and level the playing field, so encouraging small firms to grow rather than worrying about VAT or its successor.

Of course, it would be more complex, so they may want to promote simplicity measures, such as the flat rate scheme! They could use these reforms as the excuse they need to do a U-turn on the ludicrous low-cost trader rules and allow services to count towards the 2% too (excluding management fees maybe to prevent abuse by agencies which is what triggered these rules in the first place).

Thanks (1)
Replying to cfield:
By johnjenkins
15th Mar 2018 12:05

If all business were registered you would do away with all the schemes. For cash flow purposes no VAT would change hands between registered business (there could easily be a register so you could verify who you are dealing with). So HMRC would get the VAT from joe public instead of some business, which was, in fact what VAT was set up to do in the first place. The only reason thresholds were brought in was to increase the "take".

Thanks (1)