Tax & admin · 16 November 2017

Small businesses hit back at proposals to lower VAT threshold

UK VAT Return
VAT is a time-consuming tax to deal with

The Federation of Small Businesses (FSB) has hit back at proposals to lower the UK’s VAT threshold, claiming it would contribute even further to the drain on small firms’ time and resources.

Small VAT-registered business owners currently spend around 44 hours – the equivalent of about six working days – managing VAT registration a year, on average, according to the FSB’s latest survey.

The FSB suggest that correctly calculating the amount of VAT owed is most frequently recognised as the most time-consuming aspect of tax compliance, with 43 per cent of small company owners identifying it as an issue.

Completing VAT returns and researching advice related to VAT were also highlighted as common time-consuming activities, by 17 per cent and ten per cent of owners respectively.

FSB national chairman, Mike Cherry, said in a statement: “VAT is the most time-consuming tax to deal with.

“Small firms and the self-employed spend days and days every year complying with their VAT obligations – time that should be spent expanding their businesses.”

The debate surrounding VAT has intensified as the chancellor’s Budget speech, on 22 November, has edged closer.

Last week, a review from The Office for Tax Simplification (OTS), and independent body, recommended that the UK’s VAT registration threshold be lowered from its current level of £85,000 to include more small firms.

Read our report of the VAT proposals

In its review, the OTS dubbed VAT threshold a “one of the highest levels in the world”, claiming that by exempting many smaller companies, this “expensive relief” was costing the UK economy £2bn a year.

Cherry warned the chancellor, Philip Hammond, not to use his imminent Budget speech to “single out” small business. He said: At a time of spiralling costs and persistent uncertainty, a lowering of the VAT threshold is the last thing our entrepreneurs need.

“Once again, small firms and the self-employed fear the chancellor could single them out for a tax grab at the Budget, this time by forcing more of them into the VAT regime. Doing so would create a real drag on business output.”

The FSB’s research found that more than a quarter of small UK company owners find VAT hard to understand. Just five per cent claim it is simple to grasp.

Some 53 per cent of owners admitted that understanding the various exemptions was the most difficult aspect of getting to grips with VAT.

“Meanwhile, nearly one in four claimed that understanding the rate at which payment is required was the hardest aspect of VAT, whilst 21 per cent said it was the different VAT thresholds.

“The VAT regime is awash with complexity and anomaly,” Cherry went on to say. “When the burden of administration falls so heavily on business owners and the self-employed, it opens the door to lost hours and honest mistakes.

“A sudden drop in the VAT threshold would punish the smallest businesses and shift, rather than solve, the bunching issue. [But], we have an issue with some firms approaching £85,000 of turnover and putting the brakes on.

“The sensible route to solving that issue lies in embracing the OTS’s recommendation for a smoothing mechanism that respects the current threshold, not forcing more small firms into the system.

“The chancellor should be prioritising simplification, rather than expansion, of VAT and the tax system at large.”

VAT debate: Small business owners respond to reform proposals

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ABOUT THE EXPERT

Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

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