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Professional tax bodies were concerned at any move to reduce the £85,000 VAT threshold without additional help for businesses to smooth their transition to becoming VAT registered.
Cliff edge
Alan McLintock, Chair of Chartered Institute of Taxation’s (CIOT) Indirect Taxes Subcommittee, said: “The high VAT threshold is a vital simplification measure for small businesses.
“The primary reason that many businesses manage turnover to remain under the VAT registration threshold is the fear that their non VAT registered competitors will undercut them. For example, a non-VAT registered decorator can submit a decorating quote for £2,000 but the VAT registered equivalent would need to charge £2,400 inclusive of VAT. This scenario applies especially in service industries where the key cost element is labour, so there is little VAT on purchases to be recovered
“Having some financial smoothing mechanism to address the ‘cliff edge’ when a business’ turnover exceeds the £85,000 threshold, and which is administratively simple, is key to addressing this issue.”
A smoothing may be achieved by a graduated VAT cost for a growing small business for those impacted by the financial burden; using the above decorating scenario as an example, whilst 20 per cent VAT would be charged, the decorator would only need to pay half of the VAT over to HMRC. This would mean that he could adjust his price and be more competitive with his unregistered competition.
Burden
The Low Incomes Tax Reform Group (LITRG) has sounded a note of caution on any reduction of the VAT threshold in the near future.
There are so many fundamental changes on the horizon for small businesses to get to grips with in the next few years, such as Brexit and HMRC’s Making Tax Digital programme, that LITRG strongly urges caution from the Government when considering introducing any further substantial changes to the business landscape, such as a reduction in the current VAT registration turnover threshold of £85,000. This will simply add further complexity and burdens on business, LITRG says.
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“We are hugely concerned that any lowering of the VAT threshold at this time could threaten seriously a small business’ ability to remain competitive in its marketplace if its trade is mainly with non-VAT registered customers.
“Lowering the registration threshold should only be considered if a smoothing mechanism can be incorporated into the VAT system to ease the tax cost and competition issues on crossing the threshold. Ideally, this should be in tandem with simpler VAT accounting and compliance requirements so that the additional administration a business must carry out on a day-to-day basis when it becomes VAT registered does not become too burdensome.
“We strongly believe that the prospect of a small business becoming a VAT registered trader is a daunting one for many and so may have the impact of stunting growth for some businesses. But if the threshold is set too low, this may entice some smaller businesses which might otherwise be compliant into the hidden economy. This is due to the overwhelming burden that they perceive VAT compliance to be and because they do not feel they can be competitive in their industry if they have to charge VAT."
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Susie Hughes © Shout99 2018
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