Startup Advice

Will the new Budget mean VAT compliance for small businesses?

Oliver Jones

Small business groups are worried the government may seek to lower the VAT threshold.

The Office of Tax Simplification has floated concerns that small businesses are “bunching” just below the VAT threshold, which is currently set at £85,000. Businesses earning just under that threshold are thought to be turning down further work in order to avoid paying VAT.

As a result, small business groups have voiced concerns that the government may be seeking to lower the VAT threshold in Wednesday’s budget.

Across Europe, the standard threshold hovers around a value equivalent to £25,000. Lowering it to that level in the UK would bring in an extra £2 billion a year, but 1.5 million more businesses would have to pay.

Small business groups issue warnings

The Federation of Small Businesses has warned against such a move, arguing that even more damaging than the VAT itself would be the admin time sunk into the “hugely complex” VAT system, which could scare some businesses owners off expansion.

The British Chamber of Commerce echoed this warning, noting that small business owners already struggle to keep abreast of tax changes and fill in tax returns – and that new VAT obligations would add a major administrative burden.

Very Annoying Tax

VAT – Value Added Tax – is sometimes known as the “Very Annoying Tax”, due to the large number of calculations required to reprice goods and recalculate margins. Small businesses are thought to spend one whole working week each year complying with VAT regulation.

VAT has also been criticised for being regressive, as individuals pay the same tax on their goods regardless of their personal income – which means that less affluent individuals will pay a greater proportion of their income on VAT than well-off individuals.