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New consultation on VAT registration threshold is encouraging

Tim Woodgates

Chancellor Philip Hammond may have made no significant tax announcements in last week’s Spring Statement, but the Government did issues a number of consultation documents, including a review of the impact of the current VAT registration threshold on small businesses.

At Moore, we’re very encouraged by this new consultation. In our experience, the ‘cliff-edge’ nature of the VAT threshold often acts as a barrier to growth.

At the moment, as soon as a business tips over the VAT threshold (currently £85,000) in a cumulative 12 month period, VAT registration is required.  Following VAT registration businesses selling goods or services directly to the public (such as restaurants or plumbers) either have to immediately charge  20% more to their customers, or, more likely, absorb this as a cost. Input VAT recovery tends to be minimal in these instances which can threaten the ongoing viability of the business.

In addition, registering for VAT introduces a significant administrative burden in the way the business has to record its transactions and provide quarterly reports to HMRC. 

The proposal to delay VAT registration in cases where turnover does not exceed 50% of the VAT threshold for more than 12 months is particularly welcome.  If after 12 months the business still exceeds the VAT threshold, VAT registration will be required at this point instead.  Where taxable turnover exceeds 150% of the VAT threshold in a 12 month period, VAT registration will be required immediately.

We believe this will encourage businesses hovering just below the VAT threshold to take on additional profitable work without needing to worry about the wider impact of business growth on the viability of their ongoing trade. 

For restaurants, plumbers and similar small businesses, this 12 month period of grace allows them to gradually increase prices or revise their overall strategy to ensure that when VAT does apply, it is a far less turbulent change.  It also gives a bit of breathing space to implement new systems, seek advice and support and generally prepare the business for  eventual VAT registration.

Moore has already responded positively to the consultation, and would encourage other businesses to do the same.  HMRC have launched an online questionnaire to gather feedback from small businesses that may not have time to respond to the full call for evidence.  The survey can be completed at– it should take no longer than 7 minutes to complete.

In our view, the proposed VAT changes seem like a sensible and pragmatic step that will encourage smaller businesses to grow.  If a wealth of smaller businesses respond to consultation positively too, we may see the idea becoming legislation in future.