As if Brexit and Making Tax Digital wasn’t enough for British businesses to contend with, some experts think this year’s budget will see a reduction of the VAT threshold to 43 thousand, down from it’s current 85,000 mark.

Hammond’s decision, to be announced during the Autumn budget on October 29th, will send shock waves through the British business community if the prediction proves correct. Hammond has been hinting at this decision for several years, with the strongest inkling coming after he commissioned a report from the Office for Tax Simplification which argued that the current VAT threshold impedes business growth by encouraging small businesses to deliberately limit their turnover in order to keep below the threshold. The same report suggests the threshold promotes the hidden economy as businesses attempt to keep their turnover at a false low via cash in hand transactions.

In March of this year, Hammond issued a Call for Evidence which cites the “growing anecdotal, academic and data-based evidence that the cliff-edge nature of the VAT threshold acts as a disincentive for small business owners who want to expand.” All of this points to the fact that there are distinct plans afoot to lower the threshold, with the only decision being when it happens.

Current European VAT Thresholds

Germany€ 17,500
United Kingdom£85,000
FranceGoods €82,800; Services €33,200
Germany€ 60,000

What are the Disadvantages of a Lower VAT Threshold

Estimates suggest some 3.5 million small businesses are currently unregistered for VAT, the taxing of which could raise the Exchequer some 1.5 to 2bn each year. Those affected may face:

  • An increased administrative and accounting burden
  • Increased tax compliance costs, especially as a result of being drawn into Making Tax Digital
  • The lowered threshold would offer particular challenges for those businesses who sell VATable goods and services to customers who cannot recover VAT themselves
  • Primary sectors affected will be tourism, construction, accommodation, food, tradespeople and professional, scientific and IT services.
  • Many small businesses will choose to pass the extra costs onto the general public

Lower VAT Is Likely to Bring a Backlash from the Business Community

As speculation mounts about what this year’s budget will bring, a backlash is already building against the possibility of lowered VAT.  Jordan Marshall, IPSE’s Policy Development Manager comments: “The Chancellor says the Conservatives are the party of business, but reducing the VAT threshold would send the complete opposite message. In these uncertain times, the government needs to back our smallest businesses rather than making it harder for them to grow by burdening them with more red tape.

“Take hair dressers, for example – many of whom are operating below the current £85,000 threshold. Lowering the threshold could see them face two stark and undesirable choices: raise their prices and risk losing clients, or absorb the cost themselves, damaging their short and long-term cash flow. Where is the incentive for them to grow?

“Instead IPSE wants to see the government increase the threshold in line with RPI as it did from 1980 until it was frozen in 2017. This would provide business with much-needed certainty and the space to grow and thrive – particularly important as our imminent withdrawal from the EU approaches. Only then can we ensure the UK remains one of the best places in the world to start and grow a business.”