Keeping the VAT threshold at its current level will cost the Exchequer £60m in 2020-21, rising to £130m in 2021-22.

The government has said that it will look at options for reform once the terms of Brexit are clear.

In March 2018 the government launched a call for evidence into the current design of the VAT registration threshold, following the recommendations of the Office for Tax Simplification (OTS) report ‘Routes to Simplification for VAT’. This followed concerns that businesses were choosing to keep their turnover below £85,000, stunting their business growth, to avoid paying VAT.

Most of the responses to the call for evidence confirmed the existence of ‘bunching’ (businesses limiting turnover to just below the threshold). However, one accountancy body noted that this may not necessarily occur purely because of the disadvantages of VAT registration but also as a result of the additional pressures on businesses as they grow.

The call for evidence found that 50% of unregistered businesses reported that they had limited their turnover to remain under the threshold. This was done through means such as not taking on work for a couple of months, closing the business or taking holidays when they were approaching the threshold.

The EU SME proposal allows businesses to exceed the threshold by 50% for a single year without registering. If they go over the 50% allowance, at any point, they must register. Additionally, if they exceed the threshold by less than 50% for more than 12 months they must also become VAT registered. This proposal received some support however, many were concerned that this would add further complexity to the VAT system

The call for evidence also proposed two administrative smoothing mechanisms. These were:

• extending the first period for which a business must account for and pay their VAT obligations to six months; and
• apply the threshold test over two years rather than one. In other words, the test would be whether the taxable turnover of a business exceeded £170,000 over 2 years rather than £85,000 in 1 year.

Respondents were generally positive although most said these methods did not go far enough. One representative body acknowledged that having a longer period to account for and pay VAT once a business has breached the threshold might ease the initial difficulty of registration. However, the administrative burden of VAT is an ongoing issue; lengthening the time before the first return must be filed would do little to alleviate the long-term problems.

The government came to the conclusion that there was not a lead option for reform although it acknowledges that an introduction of a smoothing mechanism to ease the financial burden of VAT registration would be welcome providing that it does not increase complexity.

VAT registration threshold: summary of responses is here.

Report by Amy Austin