The ‘design’ of the VAT registration threshold

Featuring Julie Towers | 14th March, 2018

The EU Commission recently published its SME VAT proposals which aim to help reduce VAT compliance costs for new businesses. The proposals set out a direction of travel for SMEs but it is not due to be implemented until July 2022. The Commission’s proposal will first need to be discussed, amended and agreed (unanimously) by each Government of the individual member states (of which, by that time, we will no longer be a part). As with all EU legislation current and proposed, the application of the SME proposal once the UK has left the EU will be determined by the negotiations.

The key parts of the EU proposal include:

  • The VAT threshold that member states currently apply only to businesses established in that member state will be extended to small businesses established in other member states
  • This national threshold will be capped at €85,000 (approximately £75,000), so significantly below the current UK threshold of £85,000
  • There will be a EU-wide threshold of €100,000 (approximately £89,000), so that if a business’s total supplies in the EU reaches this threshold, it will no longer be able to benefit from any national thresholds
  • Small businesses up to a turnover of €2,000,000 (approximately £1,770,000) will benefit from simplification schemes targeted at removing interim payments and increasing the length of the return periods to a year.

The case in favour of a higher VAT registration threshold is that it helps to encourage growth because it keeps small businesses free from the burden of accounting for and charging VAT for longer. While this exemption for small businesses makes it easier to start up, there is evidence that the VAT threshold may provide a brake on growth, as businesses approach it.  The VAT registration threshold in most other EU member states is either much lower than that in the UK, or nil.

The Office of Tax Simplification (OTS) has suggested that reducing the threshold would make it harder for businesses seeking to evade VAT to remain undiscovered. At the moment, because so many of the smallest businesses can legitimately remain under the threshold, it is relatively easy for businesses which illegally evade VAT to feel that they can stay under the radar (although in reality HMRC has a number of ways of targeting these evaders).

In addition to impacting the growth of businesses under the threshold, the Government considers there is also likely to be an impact on those above the threshold. Businesses just above the threshold may be unable to compete with unregistered businesses which are similar in nature but have to charge their customers VAT. This hampers the ability of the registered businesses to grow. If small businesses are restricting their growth, then they may also be hindering their productivity. It is likely that if businesses are suppressing their turnover to stay below the threshold, they may be limiting the natural size of their business.

The OTS has suggested two administrative options for easing the business journey from not having to do any VAT accounting, to full VAT accounting:

  • Extending the first period for which a business has to account for and pay their VAT obligations to six months. This is similar to the approach taken by New Zealand, which allows small businesses that turn over up to NZ$500,000 to file six monthly GST returns, as opposed to their standard one or two monthly returns
  • Applying the threshold test over two years rather than one. The test would then be whether the taxable turnover of a business increased over £170,000 over two years rather than £85,000 in one year.

The Government is requesting input from interested parties before 5 June 2018.

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