VAT Threshold Cut Proposed in Latest Report Could Spell Additional Pain for Stockport Small Business

Stockport small businesses face being brought into VAT if the government accepts the Office of Tax Simplification VAT reforms that have been recommended.

This week, the Office of Tax Simplification has made several recommendations to the government regarding VAT. The implications of this report might be felt across the small business community, as the outstanding recommendation is that the VAT threshold is cut dramatically, to bring numerous SMEs and small businesses under the VAT umbrella for the first time.

Although the report does not make an outright recommendation of the exact level, it does “ponder” whether the current VAT level of £85,000 could be lowered to around £26,000, the current national average wage.

Millions of small businesses forced to add VAT

If such a proposal were to be taken up by government, it would mean millions of small businesses being dragged into the VAT fold, with all its implications.

The benefit for government, apart from increased revenue from VAT would be to make it harder for businesses that wish to illegally evade VAT to remain undiscovered.

Making Tax Digital implications

The lower threshold would also have the knock on effect of many small businesses having to add increased administrative costs, since it would result in a greater number being mandated and required to join the making tax digital sphere, and so having to obtain the relevant software to submit returns to HMRC.

Will it happen?

Delivering such a huge change would not be without it’s issues for HMRC. With a million new VAT applications appearing in one go, it’s unlikely the already overburdened HMRC system will be able to cope. Some experts suggest it might take a year for such changes to be brought into effect.

There is also considerable speculation on how quickly the changes would be allowed to come into effect. Would government look for a step change of, say, £10,000 a year? Or go for a one off drop to the desired level?

There seem to advantages and disadvantages to each method. But the implications for small business will remain the same: small businesses would have to suddenly become very closely acquainted with the sometimes antiquated VAT laws.

Ironing out the VAT irregularities

The current VAT system is riddled with all kinds of oddities and escape loops. Well publicised ones, such as the Jaffa Cakes controversy are well known – after an epic court battle, Jaffa cakes are now classified as a cake, not a chocolate-covered biscuit, which means they are zero-rated. In the same way, a gingerbread man with chocolate eyes is zero-rated, but if it has chocolate trousers it is standard rated.

In fairness to the OTS, all of this will need to be ironed out, and the OTS’s tax director Paul Morton has stated that business will require “better and more accessible guidance” and “a less uncertain penalty system”.

Making it simpler for small business?

The goal of the OTS seems to be to simplify many of the irritating administrative technicalities in the VAT and tax system, and to “kick off a debate”.

Whether it will work, be simple for small businesses and allow them to continue trading and to grow is debatable. Having seem many of these situations before, our fear is that it is usually the little guys who suffer most. But we wait to be proven wrong.

If you have any questions or queries about tax, VAT or how much you should be paying, contact Steven Glicher & Co Accountants and get your small business accounts into order.

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