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16 November 2017

Lowering VAT threshold would drain small firms of time and money

Small businesses across the UK are spending a working week every year complying with their Value Added Tax (VAT) obligations, according to new research from the Federation of Small Businesses (FSB).

The latest FSB survey shows that VAT-registered small business owners spend an average of 44 hours, the equivalent of six working days, managing VAT administration every year. 

Correctly calculating the proportion of VAT owed is most frequently identified as the most time-consuming element of adherence, with four in ten firms flagging this as an issue (43%). Filling out VAT returns (17%) and researching guidance (10%) are also commonly highlighted as time-consuming elements of the process.     

Mike Cherry, FSB National Chairman, said: “VAT is the most time-consuming tax to deal with. Small firms and the self-employed spend days and days every year complying with their VAT obligations – time that should be spent expanding their businesses.

“Once again small firms and the self-employed fear the Chancellor could single them out for a tax grab at the Budget, this time by forcing more of them into the VAT regime. Doing so would create a real drag on business output.

“At a time of spiralling costs and persistent uncertainty, a lowering of the VAT threshold is the last thing our entrepreneurs need.”  

The new research finds that over a quarter of firms (27%) find VAT difficult to understand, compared to a fraction (5%) who describe it as very simple to grasp.

Common causes of this barrier to understanding are different exemptions (53%), establishing the rate at which payment is required (24%) and different thresholds (21%).  

Mike Cherry added: “The VAT regime is awash with complexity and anomalies. When the burden of administration falls so heavily on business owners and the self-employed, it opens the door to lost hours and honest mistakes. Small firms are not like corporations – they don’t have accounting expertise on tap.

“We have an issue with some firms approaching £85,000 of turnover and putting the brakes on. The sensible route to solving that issue lies in embracing the Office of Tax Simplification’s recommendation for a smoothing mechanism that respects the current threshold, not forcing more small firms into the system.  

“A sudden drop in the VAT threshold would punish the smallest businesses and shift, rather than solve, the bunching issue. The registration cliff-edge remains a concern for many firms, but making huge swathes of businesses and the self-employed join the hugely complex VAT regime is not the answer. The Chancellor should be prioritising simplification, rather than expansion, of VAT and the tax system at large.”