VAT threshold for small firms ‘harming economy’
THE VAT system is to be reformed after a review commissioned by Philip Hammond found that the current rules were hurting the economy.
The review, carried out by government advisers at the Office for Tax Simplification, found that the threshold above which businesses pay VAT was discouraging small businesses from expanding.
The report, due to be published next week, will set out options that are expected to be used to create a windfall for the Treasury in the Budget later this month.
One of the suggested options would involve a million extra businesses and self-employed people having to charge customers an extra 20 per cent for goods and services for the first time.
It follows reports that the Chancellor is planning a tax giveaway to help “Generation Rent”, suggesting new ways to increase revenue through tax might also be under review.
In last year’s Autumn Statement, Mr Hammond asked the OTS to conduct a
‘There does seem to be an impediment to growth and to people maximising their businesses’
review into how the VAT system could be simplified. At present, businesses with a turnover of £85,000 and above must enter the VAT system and charge VAT on their sales, while smaller firms are exempt.
But the OTS has warned that the threshold, which is one of the highest of any country in the world, is “expensive” and discourages businesses from expanding beyond this point.
By reducing the threshold to £26,000, the Government could rake in an extra £1.5billion to £2billion a year by bringing a million additional small businesses in to VAT, it claims.
Paul Morton, tax director at the OTS, said: “There does seem to be an impediment to growth and to people maximising their businesses in the current system. We think that in the absence of an £85,000 VAT threshold, at least some of these businesses would carry on growing.
“A threshold at around £20,000 would only exclude hobby businesses, and therefore eliminate this ‘cliff edge’ problem that we have at the moment.” The OTS said it had been contacted
by businesses saying they were refusing work in order to stay under the threshold, including shops that closed for part of the year, and bed & breakfasts that deliberately left rooms empty.
Helen Miller, associate director and head of tax research at the Institute for Fiscal Studies, said lowering the VAT threshold for businesses could be a “very sensible” move, adding that the Chancellor could be looking to use VAT reform to boost the Treasury’s coffers.
She said: “In an ideal world, having all businesses in VAT makes sense because the way it works is in a chain. So when you have some in the chain and some which are not, that can have a distorting effect. I know of business owners who shut up shop and travel around the world for long periods because it makes better financial sense for them to do that than work and pay VAT. That is not good for the economy.”
The report will also put forward an option in which 800,000 businesses with turnovers below £500,000 could be removed from the VAT system. But experts said this would cost too much to implement in the current climate.
A third option was a tiered VAT system in which smaller businesses paid lower rates on a sliding scale. However, Mr Morton said such a scheme would “add complexity” to an already fiendishly complicated system.
VAT is a proportional tax paid on all sales which raises around £120.1 billion annually for the Treasury.