Tax & admin · 7 November 2017

VAT reform proposals could bring more small businesses into the system

VAT reform could see the registration threshold reduced and bring more firms into the system
VAT reform could see the registration threshold reduced and bring more firms into the system

An independent review has proposed significant changes to the VAT system, promising to simplify the tax burden for small business owners. But, with indications the entry threshold could be reduced, an organisation representing smaller firms has called for reform to instead focus on supporting entrepreneurs.

The Office for Tax Simplification (OTS), an independent office set up in 2010 as part of the Treasury, has published a report on the UK’s VAT system which advises HMRC to undertake a “comprehensive review” into the reduced rate, zero-rate and exemption schedules.

However, the most significant issue identified in the report was the current VAT threshold – the level of turnover above at which a business enters the system and must charge VAT on all sales. According to the report, the UK’s £85,000 VAT threshold is “one of the highest levels in the world”.

In the 2016/17 tax year, businesses raised £120bn in VAT, amounting to 22.5 per cent of all tax collected in Britain. However, the OTS warned that some business owners were discouraged from expanding their company due to the high registration threshold.

The OTS cited the exemption of many small businesses out of the VAT system as “an expensive” relief that costs the Treasury £2bn per year.

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In a statement, OTS board chair, Angela Knight, said there was an opportunity to address the “many anomalies” of VAT and suggested the report had predominately laid out proposals that would benefit business owners.

“For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold,” Knight said.

Meanwhile, OTS tax director Paul Morton confirmed the report would identify the effects of the existing threshold, and look to simplify the boundaries between between standard and reduced rates of VAT, such as the flat rate scheme.

Welcoming the review in principle, Mike Cherry, chairman of the Federation of Small Businesses (FSB), argued for VAT reform that empowered smaller firms, but did not seek to bring more into the system and further the tax burden.

“Given that the VAT regime is so awash with complexity, there needs to be substantial simplification before any more small firms are brought into its scope,” Cherry said.

“It’s promising to hear that an OTS review of VAT is on the way and we are calling for it to have simplification, not threshold reduction, front and centre.”

Cherry cited research suggesting one in four small business owners already felt VAT was the most complex tax to deal with, and claimed the review created the opportunity to alleviate much of the administrative burden.

He added: “Small firms aren’t like big corporations – they don’t have accounting expertise on tap. Our small business owners should be spending their time and money growing their firms, not navigating an array of different VAT schemes and an inconsistent list of exemptions as long as your arm. VAT should also not be used as a back-door to bringing more firms into mandatory quarterly tax reporting.”

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Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.