Chancellor scraps plan to halve VAT rate for small business

Halving VAT threshold would have dragged thousands of SMEs into VAT system

Philip Hammond has reportedly scrapped a Budget plan to halve the VAT tax threshold for small businesses to £43,000, which would have dragged tiny firms into the system.

Currently some 55 per cent of small business sit outside the VAT system.

Instead the Chancellor will use the freedom afforded him by Brexit by introducing a phased system.

Currently, only companies whose turnover is over £85,000 have to charge 20 per cent on all sales.

This should encourage small businesses not to avoid paying VAT because of the amount of red tape as their turnover approaches £85,000. Wheezes have included closing down operations for parts of the year so they do not cross the threshold.

This “bunching” phenomenon stops firms from growing, which in turn leads to lost tax receipts – costing the Treasury around £2bn a year.

Mr Hammond has been weighing up whether to get around the “bunching” problem by drastically lowering the threshold to £43,000, which would have affected half a million SMEs and raised up to £1.5billion for the Treasury in extra VAT receipts, according to the Financial Times.

But successful lobbying by small business groups such as the Federation of Small Businesses and a backlash from Tory MPs pushed the chancellor to scrap the idea, according to The Sun.

Instead, the Chancellor will extend the £85,000 threshold for a further two years to 2022. A Treasury source told the newspaper the Chancellor’s decision was “pretty definite”.

Mike Cherry, chairman of the FSB, said: “Speculation about a drop in the £85,000 turnover threshold for registration is very concerning. Suddenly dragging more firms into the VAT regime wold be incredibly damaging, placing a huge admin burden on thousands of businesses.”

Indeed, halving the VAT threshold would add to what Cherry calls “the perfect storm” of cost increases affecting SMEs. These include rising business rates, pension auto-enrolment costs and the ongoing problems of late payments, the FSB chairman told SME.

Reducing the threshold would have increased administrative costs for small businesses. Official estimates of the additional expenses include a one-off £40 charge for registering, and £675 a year for tasks such a submitting VAT returns and issuing VAT invoices.