What Would Happen if the VAT Threshold was Reduced?

20 December 2017, 11:54

Could we eventually see a huge drop in the threshold for VAT? That is the question that has arisen since the Budget in November. The current threshold in the UK is way above the limits in force across some European countries. However, since we are leaving the EU, we won’t be required to stay in line with any plans they may have to reduce limits, or to make them the same across the EU area.

But we could still see a drop in the threshold in the future. according to the latest statistics, around 55% of small businesses are below the level required to register for VAT, which is currently set at £85,000 (turnover, not profit). If the threshold was lowered, many more small businesses would need to register. This would incur charges for doing so, and further costs associated with the records that would need to be kept. Furthermore, the extra time involved in keeping these additional records would cause issues for many businesses, especially those with little or no employees.

The question is whether some businesses are deliberately not expanding or growing their turnover because they want to remain below the threshold. While this is no doubt true, it could harm many more businesses if the threshold was lowered and they needed to tackle the extra paperwork such a move would lead to. The idea would be to add VAT to sales, but not all businesses could do this and remain competitive. Some would need to fund the tax themselves, which would lead to less profit and perhaps even severe problems for some. While the obvious move would indeed be to add the tax on, some customers would go elsewhere rather than to stump up the extra payment.

Hence why the Chancellor is looking at the matter before making any firm decisions. However, if he did decide to reduce the threshold, it would risk a huge backlash from the business community. It could also harm the government politically, as many business owners might choose to vote for another party.

Clearly, it will be some time before we discover what the outcome of this consideration is. However, many small business owners will be hoping things remain broadly the same. Any reduction in the limit could well affect a lot of people – and in more ways than might be guessed. Moving the goalposts now and reducing the registration threshold by a huge amount will have knock-on effects that can only be guessed – and which might be more dramatic than anyone could have envisaged. And once the changes occur, there is little chance they would ever be reversed. There is much to consider here – and the idea that changes would raise a lot for the Treasury is only a small part of the whole picture.