The ATT has urged small businesses to take part in a seven-minute Treasury survey on the design of the VAT threshold, as set out in today’s call for evidence by the Government. The ATT hopes it will make the Treasury aware that the negative impacts on small businesses of simply reducing the VAT threshold will be exaggerated by the imminent introduction of digital record keeping and reporting requirements, and Brexit.
In his Spring Statement today, the Chancellor announced a call for evidence and short online survey1 to explore whether the design of the VAT threshold2 could better incentivise growth.
The call for evidence and survey follow a report last year by the OTS which set out concerns that the current level of the VAT threshold and its cliff edge nature distort taxpayer behaviour;3 in particular, small businesses may choose to keep their turnover below the threshold, either by legitimately limiting their expansion or illegally under-recording their takings.
Today the Chancellor announced that, to tackle this distortion, the Government will consult further on both the level of the VAT threshold and its design.
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:
“We welcome the Government’s decision to look at not just the level of the VAT threshold, but also its design.
“Given the importance of any change to the VAT threshold for smaller businesses we welcome the Government’s release of a short online survey alongside their formal call for evidence. We encourage small businesses to complete this survey, which should only take around seven minutes, to ensure that their voices are heard.
“The most appropriate way to address concerns that the current VAT threshold distorts taxpayer behaviour is to smooth the impact on businesses of crossing the threshold for the first time. Although reducing the VAT threshold would appear to be a simpler solution, it would result in unwelcome added costs and burdens for small businesses who suddenly find themselves above the VAT threshold, as well as adding to the tax burden on households in the form of additional VAT.4
“From 1 April 2019 all businesses with turnover above the VAT threshold will have to keep digital records under the Making Tax Digital (MTD) reforms.5 Any future reduction in the VAT threshold would mean that very many businesses with lower turnovers would have to cope not only with VAT but also the burdens and costs of MTD. The imminent introduction of MTD for VAT together with the current uncertainty surrounding Brexit further reinforce our belief that it is not appropriate to bring more small businesses into the scope of VAT by lowering the threshold.
“While we welcome the announcement of a wider consultation on ways in which the VAT threshold could be reformed, we encourage Government to look beyond the headline threshold figure when deciding on their final policy.”
Notes for editors
1. The call for evidence and survey can be found here.
2. The VAT threshold is the level of turnover above which a business is required to register for and charge VAT. The VAT threshold is currently £85,000, and the Chancellor announced at Autumn Budget 2017 that it would be frozen at this level until April 2020.
3. The OTS report to Parliament was published on 7 November 2017 and can be found here.
4. VAT registered businesses can often reclaim from HMRC the VAT which they incur on purchases, subject to specific restrictions. As a result, business selling to other businesses can often simply add VAT on top of the purchase price – their customers will generally only be interested in the VAT exclusive price as any VAT charged on top is not an absolute cost to their business.
By contrast, the general public cannot reclaim VAT on purchases. A business which becomes VAT registered and which is selling to the public therefore has to either:
- Increase their sales price to include the VAT, or
- Charge the same price, but cover the VAT from their own profit margin.
5. Under Making Tax Digital (MTD) businesses will be required to keep digital records and make quarterly reports to HMRC.
MTD was originally to be introduced for income tax from 1 April 2018. However, on 13 July 2017 the Government announced that it would be delaying the introduction of MTD. Under the new timetable:
- Only businesses over the VAT threshold (currently £85,000) will have to keep digital records.
- Digital records will only be required initially for VAT purposes, and only from April 2019.
- Business will not have to keep digital records or report quarterly for other taxes (e.g. income tax and corporation tax) until April 2020 at the earliest.
More information on MTD can be found here.