Small businesses face digital filing early if VAT threshold drops

Proposals put forward by the Office of Tax Simplification (OTS) suggesting a potential reduction in the VAT registration threshold could impose digital record keeping requirements on small businesses earlier than expected, as well as increasing costs and administrative burdens, the Association of Taxation Technicians (ATT) is warning

The recent OTS report set out a range of options for simplifying VAT from both a technical and administrative perspective, arguing that the current level of the VAT threshold and its cliff edge nature distort taxpayer behaviour. 

The VAT threshold is currently £85,000, the highest in the EU, which means that many small businesses choose to keep their turnover below the threshold, either by legitimately limiting their expansion or illegally under-recording their takings, in order to avoid the costs and administrative burdens of becoming VAT registered, the report points out. 

One of the main OTS recommendations is that the government should examine the current approach to the level and design of the VAT registration threshold in order to address this distortion.

One option would be to significantly lower the VAT threshold. The OTS suggest that this would reduce the unregistered business population and competitive distortions, and make it harder for businesses seeking to evade VAT to remain undiscovered.

Yvette Nunn, co-chair of ATT’s technical steering group, said: ‘We are concerned that any significant reduction in the VAT threshold would result in unwelcome costs and burdens for small businesses – as well as increasing the tax burden on households in the form of additional VAT.’

The OTS analysis suggested that  reducing the VAT threshold from £85,000 to £43,000 would impact between 400,000 and 600,000 businesses. Nunn pointed out that this would involve them in either handling VAT recovery or absorbing additional costs themselves.

‘In addition, from 1 April 2019 all businesses with turnover above the VAT threshold will have to keep digital records under the Making Tax Digital reforms. Any reduction in the VAT threshold would draw small businesses into Making Tax Digital record keeping obligations earlier than they may have expected.’

Making Tax Digital was originally to be introduced for income tax from 1 April 2018.  However the government has now announced a new timetable which means only businesses over the VAT threshold will have to keep digital records. Digital records will only be required initially for VAT purposes, and only from April 2019. Business will not have to keep digital records or report quarterly for other taxes (e.g. income tax and corporation tax) until April 2020 at the earliest.

Nunn said: ‘In addition to the time needed to get to grips with the new Making Tax Digital requirements, those businesses may face extra costs for adviser fees and software.  HMRC already estimate the annual VAT compliance cost for a small business to be around £675 per year and that is without factoring in Making Tax Digital obligations.’ Nunn said.

The ATT is pressing the government to consider the alternative approaches suggested by the OTS, including the potential to smooth the impact of the registration threshold.

Nunn said: ‘The imminent introduction of Making Tax Digital for VAT and the current uncertainty surrounding Brexit mean that we do not believe this is the appropriate time to increase compliance burdens and costs for small businesses in this way.’

The OTS report, Value added tax, routes to simplification, is here.

Report by Pat Sweet

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