Spring Statement 2018: review of VAT threshold

The Treasury has launched a consultation to assess how the VAT registration threshold can incentivise small businesses to grow after it was reported that many opt to stay below the £85,000 turnover mark to avoid paying VAT

Although small businesses incur extra administrative costs when they register for VAT, many voluntarily register to be able to reclaim VAT on purchases.

In its consultation the Treasury is considering introducing a smoothing mechanism by which businesses would be allowed to exceed the threshold by 50% for a single year without registering for VAT. However, if they exceed the 50% mark they must register and if they exceed the threshold by less than 50% for 12 months then they must also register.

To accompany its consultation the Treasury has also launched a survey which it says should take no longer than seven minutes to complete. This is for the convenience of small businesses who may not have the time or resources to respond to the call for evidence but would still like to raise their issues.

The Treasury has taken into account that any changes to the design of the threshold should be announced well in advance to allow small businesses to adequately prepare.

Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said: ’The most appropriate way to address concerns that the current VAT threshold distorts taxpayer behaviour is to smooth the impact on businesses of crossing the threshold for the first time. Although reducing the VAT threshold would appear to be a simpler solution, it would result in unwelcome added costs and burdens for small businesses who suddenly find themselves above the VAT threshold, as well as adding to the tax burden on households in the form of additional VAT.

In December 2017, Chancellor Philip Hammond asked the Office of Tax Simplification (OTS) to examine the impact of a higher or lower VAT threshold. The OTS found that a high threshold has a distortionary impact on business growth. This is because of ‘bunching’, where small businesses deliberately limit their turnover to remain below the threshold.

From April 2019, Making Tax Digital for VAT will become mandatory for businesses with a turnover above the £85,000 VAT registration threshold. It is possible that Making Tax Digital will add to the bunching effect as business will want to avoid the extra costs and administrative burden that comes with the quarterly filing obligations.

The consultation closes on 5 June 2018

VAT registration threshold: call for evidence 

Report by Amy Austin

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