The VAT registration threshold – too high?

As was expected in the Spring Statement the Chancellor announced a call for evidence into the effect of the current VAT registration threshold on growth, The Government believes that the current ‘cliff edge‘ VAT registration threshold may act as a disincentive to growth of small businesses and to consequent improvements in productivity. This was noted by the Office of Tax Simplification in its review of VAT published last year, and which recommended that the Government examine the current approach to the VAT threshold.

Business views on the threshold are divided. Some argue that having a high threshold has the benefit of keeping the majority of small businesses out of VAT altogether, avoiding all the administrative requirements that accompany the tax. Others consider that a lower threshold would reduce distortions of competition.

The Government’s call for evidence is split into three sections:

  • the first explores in more detail how the threshold might currently affect business growth
  • the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
  • the third considers possible policy solutions, based on international and domestic examples.

We recommend that any small enterprises, including charities, which are currently trading below or near the threshold explore the paper and the questions it asks as this could mark a fundamental change to the way VAT operates in the UK.