Will the Chancellor consider OTS calls for changes to VAT registration threshold?

On the 7 November the Office for Tax Simplification (OTS) issued a report on VAT. The report suggested 23 steps that could be taken to make VAT simpler.

 The detail of the report can be found here.

https://www.gov.uk/government/publications/ots-report-on-routes-to-simplification-for-vat-is-published

Whilst these reports get highlighted in the accountancy press it’s unusual for them to be discussed more widely. It has been suggested however, that one recommendation might have been paving the way for an announcement in this tomorrows budget.

Chapter One discusses the benefits of reducing the VAT registration threshold, currently £85,000. This is one of the highest in the world and £65,000 higher than the EU where it is around £20,000. Apart from the c. £1.5bn a reduction might raise for the Treasury it is suggested that the current limit stifles growth.

“…there is clear evidence from academic analysis of HMRC data and from submissions to this review that the high level of the threshold is having a distortionary impact on business growth and activity”

This is because of the belief that small business owners choose to stay below the registration threshold partly to avoid the admin burden that registration causes but also to remain price competitive against others who are not registered. In my experience most of the unregistered small businesses will be the last in the chain, consumer facing. We’re talking of trades, independent retailers, health & beauty and other small consumer services.

Reducing the threshold would therefore either reduce the profits of small businesses that need to register or increase prices for consumers.

I can’t disagree with the conclusion drawn by the OTS as I’ve had conversations with clients about the pros and cons of breaching the threshold. A lower threshold would reduce these conversations and might encourage some business owners grow. It would however add an extra worry and administrative burden for many business owners.

There’s another factor that might encourage the Chancellor to consider reducing the limit. With VAT registered businesses reporting into the Making Tax Digital (MTD) programme from 2019 it would mean an accelerated implementation for many businesses.

It might be a huge amount of hot air but there are some interesting debates to be had and the Chancellor might just start them off on Tomorrow… we will see!