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.
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”.