600,000 small firms may be hit by VAT hike

UP to 600,000 small businesses could face a punishing tax hike if a major shake- up of VAT goes ahead.

Thousands of popular goods and foods could also incur the duty for the first time.

But the shake-up could also see red tape for smaller businesses scrapped and fines slashed for those which fail to fill out paperwork on time.

Small companies with a turnover of under £85,000 a year do not currently have to charge VAT on goods and services.

But it is feared that Chancellor Philip Hammond could be plotting a shake-up to boost his tax take, while simplifying the system. Cutting the tax-free sales level from £85,000 to £43,000 would rake in up to £1.5billion extra a year for the Exchequer, according to a report yesterday.

However, it would also mean between 400,000 and 600,000 more businesses paying VAT, according to the Office for Tax Simplification, which makes recommendations to HM Revenue & Customs.

Mike Cherry of the Federation of Small Businesses said: ‘Any reduction of the VAT threshold against the current backdrop of uncertainty and spiralling costs will have a hugely negative impact on growth within the small business community.’ John O’Connell of the TaxPayers’ Alliance added: ‘We should not accept stealth tax increases under the mask of simplification.’

The OTS said many firms were reluctant to grow for fear of breaching the cut-off point and being forced to charge the 20 per cent tax. The organisation called on ministers to examine the threshold to decide if it is set at the right level. It also raised concerns about the complexity of VAT.

Many essential items, such as food, children’s clothing and newspapers, are exempt. But quirks mean the tax is not payable on Jaffa cakes for example because they are classed as cakes rather than biscuits.