One million British small businesses face being brought into VAT if the government accepts the Office of Tax Simplification’s VAT reform recommendations.
The OTS report, published Tuesday, suggests numerous changes to a VAT system “awash with layers of complexity”. The blockbuster recommendation is to drastically lower the VAT threshold from its current level of £85,000 (one of the highest in the world).
The report doesn’t make an outright recommendation, but it does ponder the consequences of lowering the threshold to a level that is close to or below the national average wage (£26,000).
This would bring around one million extra businesses into the VAT fold, and “make it harder for businesses that wish to illegally evade VAT to remain undiscovered”.
A lower threshold would also herald MTD’s return as a relatively immediate concern for small businesses. The OTS report admits: “Many small businesses would also face increased administrative costs”, since “a lower threshold would result in a greater number of businesses being mandated and required to obtain relevant software to submit returns to HMRC”.
The burden on an already stretched HMRC would be pretty severe, too. “HMRC would suddenly have a million new VAT applications,” said Neil Warren, an independent VAT expert. “It would probably take them a year to work through it.”
How the government would potentially go about introducing the radical lowering of the VAT threshold is another burning issue. According to Warren, there are a couple of approaches.
“They could bring it down by £10,000 every year for five years, for example,” said Warren. But this would only move the “cliff edge” the OTS identifies in its report, where many growing businesses deliberately avoid expanding beyond the VAT threshold.
It results in a “very visible bunching of businesses just before the VAT threshold, and an equally large drop in the number of businesses with turnovers just above the threshold,” the OTS wrote.
Lowering the threshold gradually, Warren said, could exacerbate this issue further. “You’re creating a different figure on the cliff edge. Sometimes the bold measures are the best ones”.
If the threshold was to be lowered, Britain’s small businesses would also become closely acquainted with VAT’s byzantine, sometimes arcane rules: as Warren puts it, “shark infested waters”.
For instance, with the VAT intricacy around Jaffa Cakes. After an epic court battle they are classified as a cake, not a chocolate-covered biscuit, so are zero-rated.
The VAT system is riddled with these sorts of taxonomic gymnastics: a gingerbread man with chocolate eyes is zero-rated, but if it has chocolate trousers it is standard rated.
If small businesses are brought into the VAT system, all of this will need to be ironed out, said the OTS’s tax director Paul Morton. The OTS report says business will require “better and more accessible guidance” and “a less uncertain penalty system”.
And the report zeroes in on specific areas of technical difficulty, including: the partial exemption regime, the capital goods scheme, the option to tax and other special schemes.
“This report presents an opportunity to start addressing the many anomalies of VAT,” said Angela Knight, chair of the OTS Board. “The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced.
“For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”