I recently read an interesting article on AccountingWeb LINK about proposals to reduce the VAT registration limit to a level (not specified) that would bring about an additional 1 million businesses into VAT. The inference was that it could be around the average national average wage, i.e. £26,000 a year, though of course at this stage it’s all speculation. There’s no suggestion that the government will implement this or when it could happen.
But if and when this does come into effect, there will undoubtedly be a lot of frustration and anger from owners of small businesses. The suggestion comes from the Office of Tax Simplification as part of a range of suggestions to “simplify” the VAT system. But at a time when many of us have been watching reports about how the wealthy avoid tax through various off-shore tax planning arrangements, it seems mighty unreasonable to require the owners of some of the smallest businesses in the country to pay 1/6th of their income in VAT.
And make no bones about it; it will be the local plumber, hairdresser, decorator and others who are often self-employed and already have very limited income who will be paying.
But then, to paraphrase a very rich lady “tax is for little people”. And that statement has never seemed more apt than at this time.
You could argue that there will be some benefits. In many countries with VAT systems, both EU and non-EU, there are no “registration limits” so you pay VAT on your sales whatever your income.
The only plus side I can see is that everybody will be in the same boat, with the same problems:
- The most impact will be for B2C businesses.
- One the one hand, there is very little opportunity or benefit in trying to keep businesses separate to avoid VAT registration.
- Prices go up as these businesses pass the VAT to their customers, pricing smaller businesses out of the market.
- A load more bureaucracy and worry for a million more people.
- VAT offices struggling to cope with the additional number of VAT registered businesses, many of whom have never, in the past, been involved with VAT.
- Flat rate schemes become more and more important – assuming HMRC doesn’t scrap them too.
- More small businesses going bankrupt.
At the very least, if the registration limit IS reduced, then we can only hope that the government follows the practice in some countries of introducing a very low rate – no more than 5% – for labour intensive businesses who have to register for VAT as a result. As taxpayers, we would also expect the government to demonstrate that they are seriously challenging tax planning arrangements that have allowed the super rich to have the benefits of living in the UK while only paying a small proportion of the tax that they would otherwise pay. With the recent leaks from the “Paradise Papers”, it would definitely be a case of Paradise Lost for the great majority of hard-working business owners.
Either way, from a political perspective, however much the government may “need” the additional revenue from, it would have to be either a very desperate or brave government who introduces such a measure.