It’s time to take VAT out of the ‘too-difficult’ box

By Colin Borland

Chancellor Jeremy Hunt has an opportunity to tackle the complexity and practical effects of VAT in his Spring Budget. It’s hard to believe that at a time when everyone in government and business needs to be straining every sinew to drive growth, a major part of the tax system is actively suppressing economic activity.

Right now across the UK, tens of thousands of small firms and self-employed individuals are deliberately scaling back their operations to keep turnover under the £85,000 VAT registration threshold. The costs and administration associated with becoming VAT-registered have been deterring smaller operators from expanding for years. With a sustained period of high inflation pushing up prices, many more are now hovering perilously close to the VAT trigger point. It’s estimated that by 2025, some 44,000 traders across the UK will be deliberately keeping their turnover just below the threshold, costing the country hundreds of millions of pounds in lost economic activity.

In a paper published last week, the Federation of Small Businesses (FSB) is pushing for the threshold to be lifted to £100,000. Two in five firms with a turnover of between £75,001 and £100,000 feel the £85,000 threshold is a barrier to growth. Three in ten in that bracket say raising it would encourage them to invest. Had the current threshold kept pace with inflation, it would be just over £100,000 today in any event.

A threshold is still a threshold, regardless of where you put it. Therefore, a smoothing mechanism to ease the transition for those who find themselves just on the wrong side of the VAT-registration line is also being argued for. For example, introducing a “VAT allowance” could reduce small businesses’ annual VAT liability by a set amount, similar to the existing Employment Allowance.