Small firms’ anger over £2bn VAT raid

PHILIP Hammond was facing a backlash from small businesses last night over a rumoured Budget VAT raid that could raise £2 billion for the Treasury.

The Chancellor is looking at slashing the tax’s threshold as part of Budget moves to ‘simplify’ the system.

At present, traders have to charge VAT only if their turnover tops £85,000 a year.

A report by the Government’s Office for Tax Simplification this month called for the ‘exceptionally high’ threshold to be cut. It found the UK’s rate was the highest in the EU, where the average is just £20,000.

Halving the threshold to £43,000 – the level said to be favoured by Mr Hammond – would affect 500,000 small firms and raise up to £1.5billion for the Treasury in extra VAT receipts. Cutting the rate to £25,000 could yield up to £2 billion, but would drag 1.5 million small traders into the VAT system.

Small business groups last night cautioned the Chancellor against the move, warning it could cause cashflow problems that would push already precarious businesses over the edge.

Mike Cherry, national chairman of the Federation of Small Businesses, said: ‘At a time of spiralling costs and persistent uncertainty, a lowering of the VAT threshold is the last thing our entrepreneurs need.’

Suren Thiru, of the British Chambers of Commerce, said: ‘A cut in the VAT threshold would be a concern for us.

‘The administrative burden of dealing with VAT is significant – we are talking about businesses that will often not have a finance director and will have to pay for external advice.

‘A lot of these businesses will also have very tight cashflow, and this would put serious pressure on some of them. I would urge the Chancellor to tread very carefully indeed.’

Martin Blanche, head of indirect tax at PwC, said: ‘Any move to reduce the threshold would be met with a backlash from the small business community both from the perspective of cost and the additional compliance burden it imposes. It could also further stretch HMRC’s resources.’

The Treasury declined to comment on ‘speculation’ about the contents of the Budget ahead of next week.

But the Office of Tax Simplification report was unequivocal about the need for a reduction in the VAT threshold.

The study found evidence of firms ‘bunching’ just below the turnover threshold in order to avoid paying VAT.

It said the cut-off was acting as a ‘significant disincentive to maximising the potential growth of some businesses’.

Speculation is mounting in Tory circles that Mr Hammond could face the sack if the Budget fails to impress. His Budget in March unravelled within days after he launched a National Insurance raid on the self-employed that breached a Tory manifesto pledge.

Mr Hammond’s gloomy warnings about Brexit have also infuriated Tory Eurosceptics, leading to fears in Downing Street that some MPs could try to pick holes in the Budget to undermine his position.