VAT break may benefit small business owners

Spring statement review into tax system expected to benefit small businesses with stepped payments

Small traders and entrepreneurs are expected to benefit from an overhaul of the VAT system set to be announced by Philip Hammond today. The Chancellor is expected to use his spring statement to launch a review into the system, which could lead to a gradual introduction of VAT on firms with an annual turnover of more than £85,000. The Daily Telegraph understands that Mr Hammond wants to see an introduction of 20 per cent VAT in a series of staggered “steps”.

SMALL traders and entrepreneurs are expected to benefit from an overhaul in the VAT system which is set to be announced by Philip Hammond today.

The Chancellor is expected to launch a review into the system which could lead to a gradual introduction of VAT on firms with a turnover of more than £85,000 a year.

The Daily Telegraph understands that Mr Hammond wants to see a gradual introduction of 20 per cent VAT above £85,000 in a series of “steps”.

The announcement is likely to form part of the Chancellor’s spring statement, which will be dominated by a better-than-expected economic outlook.

This year’s speech to MPS will be a slimmed down affair, lasting just 20 minutes because of Mr Hammond’s decision to use the Budget in November to set out any big tax changes. One source said Mr Hammond is expected to be more optimistic about the economy than MPS have heard before.

Currently there is a “cliff edge” which means that firms are hit with a sudden VAT bill when their annual turnover reaches £85,000.

This also causes a “bunching” of companies just below the £85,000 threshold because they have an incentive not to cross it and risk squeezing their profit margins.

There have been reports that firms deliberately suppress their recorded takings and then report a turnover below the threshold. Mr Hammond made clear in a letter last November that he would not reduce the £85,000 VAT threshold, which would have hit thousands of small firms with bigger tax bills.

But he told the Office for Tax Simplification that he wanted to to see a review. He said: “The Government’s ability to amend the scope of the various rates and exemptions is limited to some extent by EU law at present.

“It is clear that the current rates structure is the root cause of much of the complexity in the VAT system, imposing administrative burdens on businesses and often confusing consumers.

Mr Hammond added: “I agree that there is merit in a review of the current system of VAT rates and reliefs in the longer term, and HMRC and HM Treasury will continue to engage with the OTS on this subject.”