VAT threshold: Should it be lower or higher?

Posted: Thu 15th Feb 2024

Ahead of the government's Spring Budget on 6 March, Enterprise Nation brought together policymakers, small business groups and entrepreneurs to debate the hotly contested issue of whether the VAT threshold, currently set at £85,000, should be lowered or raised.

At the start of the online event (see the full recording above), attendees were polled on their views. The result highlighted an even split of opinion.

In the survey, 37% of attendees said they would like to see the VAT threshold raised, with an equal 37% agreeing the opposite. 26% of attendees said they felt that the current threshold ought to be maintained.

Following this result, Enterprise Nation's founder and CEO, Emma Jones CBE, put forward the case to raise the threshold.

The case to raise the VAT threshold: Emma Jones CBE, CEO, Enterprise Nation

Emma Jones argued that the UK's current VAT registration threshold of £85,000 is an arbitrary turnover limit, which places a ceiling on small business growth and imposes unnecessary administrative burdens on small firms. Emma outlined that small businesses reaching the registration threshold face a 20% VAT bill applied to turnover, not profit.

"Unable to raise prices 20% without losing customers, small firms end up absorbing VAT costs themselves. The substantial administrative workload involved with VAT registration also hampers productivity."

Emma referenced the view of Enterprise Nation member Jack Stopforth, founder of Taylor Stopforth Consulting. He told us that he sees the current VAT regime as "another chore he could do without", arguing that the threshold should be raised so he can "focus on winning business and serving his clients".

Emma cited data from the Office for Budget Responsibility, which found that approximately 44,000 businesses will chose not to grow their revenue to avoid facing the 20% charge associated with registering for VAT.

Emma argued that raising the VAT threshold to £100,000 would provide vital breathing room for small firms to focus on growing their business. With reduced pressure to minimise turnover, small businesses could invest profits into upskilling employees, new equipment and marketing - building resilience and driving productivity.

Emma concluded by suggesting that avoiding VAT registration, and the 20% VAT cost to profit margins, would enable small businesses to offer simpler and more steady pricing to customers. This would help them maintain customer loyalty and boost their competitiveness, which is particularly relevant for high street businesses.

The case for the VAT threshold to be lowered: Dan Neidle, founder, Tax Policy Associates

Dan Neidle began his counter argument, asserting that Emma Jones' diagnosis of the flaws of the current threshold was correct, highlighting that it "stops businesses growing".

He added that it is "madness" that if a business suddenly turns over £1 above the threshold, then everything it offers is subject to the 20% VAT charge. Dan also pointed to the "calamitous cliff edge" of £85,000 in turnover which businesses "dare not cross".

Dan suggested that while it is natural for businesses to want the VAT threshold raised, doing so would not solve the problem. Rather, it would just "move it" onto larger businesses, at a cost of around £2bn in lost tax revenues, which would have to be accounted for elsewhere.

"If all that we're doing is letting this businesses grow a little bit more and then putting them in exactly the same spot, then we are solving nothing."

Dan pointed to solutions globally, highlighting the current rate of VAT thresholds across Europe, which are far lower than the UK - "typically, they're at about the 30-35,000 Euro mark. Why can't we do that?".

Dan suggested a better way to improve the experience of businesses in this area would be to lower the threshold, and lean on technological innovation to reduce the administrative burden VAT imposes on businesses.

"This is the era of apps. It's the era of artificial intelligence. And we don't need government to invent an IT system to solve this."

Dan argued that the primary issue with the VAT threshold, aside from administration, is competitiveness, and proposed that lowering the threshold would even the playing field from a pricing perspective.

To illustrate the point, Dan pointed to European nations like Germany and France, where small businesses are able to thrive in an environment with the overwhelming majority of businesses charging VAT due to their low thresholds. He added that we should instead consider achievable ways to lower the threshold while not punishing businesses with additional admin requirements.

Dan concluded his argument by suggesting that every pound raised by lowering the threshold should go into reducing the headline rate. He said the headline rate of VAT could be dropped for everyone by a couple of percent if this happened. The evidence from the rest of the world is that it is workable.

In addition, the link between VAT-paying employers in the beauty industry and their ability to take on apprentices was highlighted, noting that apprenticeships are crucial to the sector's future skills and growth at a time when numbers have significantly declined.

Contributions from Confederation of British Industry, British Chambers of Commerce, National Hair and Beauty Federation and small business owners

Andrew Scott, Confederation of British Industry (CBI) principal tax adviser, argued that the UK government's ability to significantly alter the current VAT threshold may be hindered by its agreement with the European Union.

He said that according to Article 3.1 of the Windsor Framework, the UK and the EU agreed that the EU's upcoming new VAT scheme, which imposes a €85,000 (£74,490) VAT threshold, will not apply in Northern Ireland.

This means that the UK's £85,000 threshold can continue to apply in Northern Ireland, but as part of the agreement, Andrew said the UK has agreed that if the VAT threshold was to be increased in the UK, it could not rise by more than 15% of the EU threshold.

Andrew suggested that schemes such as Making Tax Digital and available accounting software should be utilised to help businesses make VAT return calculations and ease record keeping burdens.

Rosina Robson, director of policy and public Affairs at National Hair and Beauty Federation (NHBF), suggested that the hair and beauty sector contains a range of views on raising or lowering the VAT threshold based on member surveys. Rosina noted that a major concern is achieving a level playing field between VAT-paying salons and self-employed individuals working under the threshold.

The NHBF had proposed a "smoothing mechanism" approach using tiered VAT rates starting below the threshold as an alternative to simply raising or lowering it. Rosina added that automating processes through digital tools could help minimise any additional administrative burdens of VAT compliance for smaller businesses.

Jonny Haseldine, policy manager at the British Chambers of Commerce (BCC), suggested that exploring "smoothing mechanisms" like tiered rates should be considered, reflecting that there is currently little political appetite for major threshold changes.

He added that schemes like Making Tax Digital, and simplifying processes for small businesses, would help address concerns about added administration from VAT compliance.

Small business owners concluded the open discussion, emphasising the importance of digital tools and apps to reduce the administrative burdens of VAT compliance for small businesses. One founder stressed the importance of proactively planning for growth and factoring in VAT costs from the start of a business rather than seeing the threshold as a limitation.

In addition, the link between VAT-paying employers in the beauty industry and their ability to take on apprentices was highlighted, noting that apprenticeships are crucial to the sector's future skills and growth at a time when numbers have significantly declined.

Furthermore, a representative from the beauty industry highlighted the recent decline in beauty businesses since 2010, suggesting that "widespread VAT avoidance schemes", and a "lack of industry regulation" were to blame.

Arguing in favour of the proposal to raise the VAT threshold, small business owners said that the UK needs to create the ideal conditions to support entrepreneurship and small businesses through the start-up to scale-up period. It was noted that many new businesses fail within three years, and that the UK's tax system should support small business incubation to retain the UK's reputation for design and innovation.

Closing and exit poll

Having concluded the arguments in favour of and opposing the proposal to raise the VAT threshold, Enterprise Nation conducted a final poll of attendees.

This time, 21% backed increasing the threshold, 43% supported the proposal to lower the threshold, and 36% agreed that it should be maintained at its current rate.

In conclusion, Dan Neidle's case to lower the VAT threshold prevailed, with a six point swing in his favour.

Enterprise Nation has helped thousands of people start and grow their businesses. Led by founder, Emma Jones CBE, Enterprise Nation connects you to the resources and expertise to help you succeed.

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