On 13th March 2018, the following consultation on VAT was launched as part of Philip Hammond’s Spring Statement:
Following the Office of Tax Simplification’s (OTS) review of the UK VAT laws, published on 7th November 2017, HM Treasury has launched a consultation on the effect that the current VAT registration threshold has on small businesses. The call for evidence contains a 22-question survey for business and other interested stakeholders, to be completed by 5th June 2018.
Last year, the OTS reported that the existing UK VAT registration threshold, which at £85,000 is the highest threshold in the EU, creates a considerable “cliff-edge” and acts as a deterrent to small enterprises from growing their business and thereby improving productivity.
It reported a distortion in small businesses’ behaviour, manifesting as a “bunching” effect under the £85,000 threshold level as they deliberately limit their turnover in a bid to avoid having to either raise their prices, or absorb the VAT cost themselves.
This consultation aims to investigate the OTS’ findings further with a view to improving the design of the UK VAT system to encourage growth. Businesses entering the registration system face significant administrative and financial compliance costs in accounting for VAT as well as the freshly acquired burden of the VAT charge itself. This hinders the desire to increase turnover and reach the VAT threshold.
A solution to the problems outlined above is to alter the design of the VAT threshold. To this end, the consultation puts forward the option of possible smoothing mechanisms which would lessen the severity of the “cliff-edge” effect. This could take the form of a flat rate scheme; or some sort of tapering relief where enterprises with a turnover between £85,000 and £115,000 may keep a proportion of the VAT owed to HMRC themselves.
A response to the consultation will be published after it closes, which should provide greater clarity on future plans for the threshold.