Walking the VAT registration plank
Tuesday, 21 November 2017
The main topic of discussion following publication of the Office of Tax Simplification’s (OTS) report regarding the future of VAT has been the level of the registration threshold. At present a business must register for VAT when its taxable turnover exceeds £85,000 – the highest in the EU.
The report has even prompted rumours that the Chancellor of the Exchequer is due to decrease the limit to as little as £20,000 in tomorrow’s Budget. Whilst I agree that would be the correct thing to do, surely such move in the current climate could be political suicide.
The report goes on to explain the concept of ‘bunching’ and the number of businesses operating just under the threshold. These tend to be services based businesses such as builders, hairdressers and takeaways which sell to the general public to whom they cannot pass on a VAT charge – a VAT registration therefore creates distortions of competition for similar sized businesses operating on opposite sides of the threshold. These are the same types of businesses which are generally run by the ordinary man on the street, whom the Government has stated in the past that it does not wish to penalise. It is suggested that bunching may occur legally when a business deliberately limits expansion by not trading at certain times of the year or turning down work, or illegally when the business owner deliberately under declares takings.
So a turnover of £85,000.01 would force say, a small one man plumbing company into registration and facing an overnight increase in his pricing structure of £17,000 or a hit to his bottom line income of £14,166.67. Whilst, someone bunching turning over £84,999.99 escapes the charge and remains competitive within the market – this has been described in the report as the ‘cliff edge’.
The OTS have suggested a number of possible solutions, including:
- Freezing the threshold – gradually bringing small businesses into registration. Hardly an answer to the problem of the cliff edge
- Reducing the threshold
- By a small amount – bringing all of the cliff-edge hangers into registration
- To a very low figure (even as low as the personal allowance!) meaning all but hobby businesses were caught by registration – this is already the case in countries such as Germany, Spain (nil) and The Netherlands
- Increasing the threshold
- By small amounts, bringing very few businesses out of registration – raising the cliff edge
- To a level in-line with the Flat Rate Scheme limit (£150,000) – without knowing the financial impact on the Treasury, this doesn’t seem absurd, but the report does go on to suggest an increase in the flat rate limit so isn’t likely to be a scenario they are considering with any real merit
- To £500k which is the level in Singapore – not happening!
A further suggestion is the introduction of a ‘smoothing mechanism’ which softens both the financial and administrative impact of VAT registration. Whilst this is a nice idea in theory, the report makes no recommendation on how this may work. The clue regarding the overall purpose of the report is in the name ‘VAT: Routes to Simplification’ whereas this seems like an unnecessary layer of complexity into a system which already bewilders many small businesses.
Whatever outcome is chosen by the Government there is likely to be a backlash from certain sectors of the business community because the level of the threshold affects different members in different ways. As is the nature of the VAT system it is likely that the ultimate loser will be the consumer.
To get in touch with our VAT Specialists, call 0330 024 0888 or email firstname.lastname@example.org
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