Tax & admin · 13 November 2017

VAT debate: Small business owners respond to reform proposals

New proposals could bring more small and micro business owners into the VAT system
New proposals could bring more small and micro business owners into the VAT system

After an independent, government-backed review last week recommended significant changes to Britain’s VAT system – including a reduction of the registration threshold – Business Advice readers got in touch to offer the perspectives of the UK’s small business owners.

The most significant proposal tabled by The Office for Tax Simplification (OTS), an independent office set up in 2010 as part of the Treasury, was the potential reduction of the exemption threshold. Under the current arrangements, small business owners with less than £85,000 annual turnover are exempt from charging VAT on goods and services.

The OTS cited Britain’s VAT threshold as “one of the highest levels in the world”, and warned that the exemption of many small firms was an “expensive relief” that costs the Treasury £2bn per year.

Read our report of the VAT proposals

Following the report, Business Advice asked readers how the proposals could affect their company and what they would do to make tax fairer. With the VAT debate now underway, one business owner argues for a reduction of the exemption threshold, before another makes the case for maintaining the entry level.

Business owner #1

“Why is there such strong resistance to reducing the VAT registration threshold?”

I do not see any benefit to keeping the VAT threshold at the high rate of £85,000. The fixed rate VAT system is really quite simple. Given free will, I would personally reduce the business registration level to £0, so that all trade done as a business carries VAT.

If you are a private individual you should fall outside the scope, but if you are a trading business it is all part of the overhead. If the threshold were below a reasonable full time income, say £20,000 or £25,000 than all would be fairer. My turnover is not massive, but is over every threshold. I retail, so most of my customers are unable to reclaim VAT. I am finding competition from unregistered businesses limiting my ability to grow.

I am suffering in a competitive market with a host of competitors and suppliers lurking (not always fully legally) below the threshold. The current encourages Grey Imports where VAT is not paid, which would cease to be beneficial if VAT had to be paid on sales.

Meanwhile, unregistered businesses also get a better profit margin because there is no VAT to pay out of the sales price, frequently resulting in price-cutting beyond sustainable levels for VAT-registered businesses.

On the other side, it is also a problem buying things for the business if the supplier is not VAT registered. If, say, searching for an ink cartridge, it is often hard to tell if the best price (frequently marked as including taxes) is VAT reclaimable or not. In a different vein, I buy several items from small suppliers where they have paid unrecoverable VAT on materials, and I have to then add VAT on again, causing double tax to be paid on a part of the cost.

If the level is set low then there is the thorny issue of monitoring it. A good start would be to ensure all traders on eBay and Amazon are VAT-monitored for registration, including those based offshore who frequently flout the import regulations by declaring everything as a gift or sample.

Business owner #2

“Hitting the VAT threshold has a huge effect on a small business and stifles growth.”

An old question I have frequently asked myself is: how can there be the same rules for small businesses as for large corporations? Hitting the VAT threshold has a huge effect on a small business and stifles growth.

In addition, depending on the industry, you may have no opportunity to reclaim. For example, a service-based company claims very little back but still must collect and pay on everything they put out. A sliding scale of VAT as the business grows could really help the small businesses grow faster and stronger.

These kind of questions apply to many areas of business size. In short, I just can’t see how the same rules can apply to large and small.

For example, if you have 100 staff and one person fall ill or becomes pregnant, you have a one per cent shortfall to cover, but if you have four staff it a 25 per cent drop that needs to be handled. How can that be reasonable?

A “cash grab” on the self-employed

Following the recommendations, the Association of Independent Professionals and the Self Employed (IPSE) warned that a reduction of the registration threshold would be a “disaster” for self-employed workers.

“In the short term, lowering the VAT threshold would lead to serious cash flow problems for many self-employed people,” argued IPSE’s economic advisor Tom Purvis.

“They would quickly be faced with the stark choice of either raising their prices – which would cause them to lose customers – or absorbing the cost themselves, which would do significant damage to their businesses.”

In the long-term, Purvis warned that reducing the threshold would discourage owners from growing their company.

“Having a low threshold is also likely to create much more paperwork and administration for people at the lower end of the earnings scale,” he added.

“Overall, piling on the costs for the UK’s smallest businesses would not only cause the self-employed themselves serious problems; it would also do significant damage to the flexible labour market and, by extension, the wider economy.”

Where do you stand in the VAT debate? Get in touch at editors@businessadvice.co.uk and let us know how the proposals could affect you

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ABOUT THE EXPERT

Simon Caldwell is a reporter for Business Advice. He has a BA in politics and communications from the University of Liverpool, and previously worked as a content editor in the ecommerce industry.

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