The VAT registration and deregistration thresholds will be frozen for two years from 1 April 2018, with the registration threshold remaining at £85,000 and deregistration at £83,000.
This is in response to the report on VAT simplification published by the Office of Tax Simplification which focused on the cliff-edge nature of the registration threshold. The government will consult on VAT thresholds over the next two years.
A business with a turnover of £84,000 which is not VAT registered does not have any VAT cost, but a business with a turnover of £85,000 faces an annual VAT bill of up to £17,000.
At £85,000, the UK’s threshold is the highest in Europe, where the average is £20,000. The advantage to this is tax simplification for more than three million small businesses. The drawback is the distortion in competition between businesses that have to charge VAT and those that don’t.
The threshold is also a major disincentive to expansion for businesses with turnover below £85,000. There is a significant bunching of businesses whose turnover is just below the threshold. They may be restricting their growth by not recruiting an extra employee or taking on an extra contract, or simply not working for a period.
What are the options?
The government report considered a range of options, including:
- A substantial increase to the VAT threshold, for example to £500,000. A nice thought, but a highly unlikely outcome given it would cost at least £3 billion a year.
- A substantial reduction to the threshold, for example to £25,000. This would bring more than a million small businesses within the VAT system and would raise at least £1.5 billion a year. Such a reduction would also act as a way to bring more businesses into HMRC’s ‘Making Tax Digital’ programme, which will initially only be imposed on businesses above the VAT threshold.
- The introduction of a smoothing mechanism. One possibility would be to allow newly registered businesses to use a reduced flat rate. Another option would be for newly registered businesses to retain a proportion of the VAT otherwise payable to HMRC.
If your business may be affected, please get in touch with us.