A “call for evidence”

One of the few newsworthy items in the Chancellors spring statement was a “call for evidence” about the impact on growth of the VAT threshold. There is, apparently, a bunching of businesses with a turnover just below the VAT registration limit of £85,000, suggesting that businesses close to the limit either deliberately take their foot off the gas to stay within it, or simply divert or stop declaring their income to avoid registration.

The point is, if your customers are consumers who are not VAT registered and therefore cannot recover the VAT you charge them, exceeding the limit means you must either absorb the VAT or increase your prices. Either way the short term impact will almost certainly be lower profits. On top of that you have whole bunch of extra admin to deal with, and penalties if you miss return and payment deadlines. So we shouldn’t be too surprised by the statistics.

This was widely reported as a threat to significantly reduce the registration limit, perhaps to as little as £25,000 per annum. This must be tempting for the government. It would collect a substantial amount of tax and sit neatly alongside Making Tax Digital, under which HMRC would have greater access to business accounting records. This would help them ensure all businesses pay “the right amount of” (translation: “more”) tax.

Certainly the VAT threshold leads to some distortion and potential unfair competition. For example, a taxi or plumbing company, employing a number of workers, would need to charge its customers VAT. If it claimed all its workers were independent contractors, each of whom were under the registration limit, they may not. There would be tax and NIC savings too. Some business models – Uber, for example – clearly benefit from this.

The evidence is that once businesses break through this artificial barrier, they grow quickly, so if more could be encouraged to do so, they, and the wider economy, would benefit.

There are a number of potential solutions. Simply reducing the threshold would be a blunt instrument and would be very unpopular. A more likely approach would be some kind of phased VAT rate over the threshold to make the transition less painful. However, this might start at something below the existing turnover limit.

If you are a business currently below the turnover limit, or otherwise wish to contribute to the debate, the consultation is open until 5 June and can be accessed via this link.