VAT Flat Rate Scheme

VAT Review in Spring Statement – Impact on Small Businesses

In his first Spring Statement, Chancellor Philip Hammond launched a consultation on a proposed review of the UK’s VAT scheme. The Chancellor had been tipped to announce wholesale changes to VAT thresholds last November as part of the budget, but because of representations from business organisations he swapped hard and fast plans for change in favour of a consultation process.

The basis of the proposed changes would see the threshold being frozen or dropped to bring more companies into the VAT net. At present the threshold increases annually in line with RPI, making it one of the highest thresholds for added tax in Europe.

But whilst the spin doctors are presenting this as an opportunity to encourage SMEs to expand and not sit beneath an unnecessary ceiling, business representatives point out that some of the proposed changes will result in up to £2 billion in extra tax payable to HMRC. Far from supporting business growth, fears are that a reduction in the threshold would actually drive many out of business.

The current threshold is £85,000 and the Chancellor believes that this generous introduction level is stopping businesses from expanding with some deliberately staying under the threshold. The proposal to drop the threshold suggests an entry level of £20,000-£40,000 which is where the estimate of a £2bn tax take has been calculated from.

VAT was first introduced in 1973 and has been tinkered with and changed by successive governments ever since. Chargeable rates have been increased and decreased, the Flat Rate scheme was introduced and even the rules over what is and is not liable for VAT have been changed: remember the pasty tax…?

Whilst this is billed as a consultation, the fact that the Chancellor pulled back from a straight forward amendment in the last budget does suggest change is coming, which will come as another blow to SMEs bearing the brunt of other recent legislative changes and increasing costs.