VAT thresh­old for small firms ‘harm­ing econ­omy’

The Daily Telegraph - - Front page - By Katie Mor­ley Con­sumer Af­fairs editor

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.

Philip Ham­mond: more small firms could have to start charg­ing VAT

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