VAT – Are HMRC set to tackle the “cliff edge”?
HMRC may be on the verge of making significant and far reaching changes to the VAT system in the UK following a recent review undertaken by the Office of Tax Simplification (“OTS”) which looked at, amongst other things, the impact of changes to the VAT registrations rules.
The UK currently has far and away the highest VAT registration threshold of all the EU Member States. UK businesses are only obliged to VAT register when the value of taxable supplies exceeds £85,000, which is more than four times the EU average (£20,000) and is in stark contrast to countries such as Italy, Spain and Sweden where there is no threshold whatsoever and so VAT registration is effectively compulsory for all businesses.
The high UK threshold has generally and historically been seen as a positive thing for small businesses in relieving both the administrative burden that comes with VAT compliance as well as, in many cases, very real net savings in not having to charge and account for VAT on income. However, this in itself can cause a problem. Although many small and start-up business begin life outside the VAT “net”, as they grow and become more successful at some point they will likely exceed the threshold and so VAT registration becomes compulsory. At this point the business must decide whether it can simply add VAT to its existing pricing structure or whether VAT now needs to effectively be adsorbed as a cost out of the net income receivable.
This is often referred to as the VAT “cliff edge” – one day your income is all your own and the next a sizeable chunk of it is payable across to HMRC.
In last year’s Autumn Statement the Government announced that it had asked the OTS to carry out a review of various aspects of the VAT system, including issues around the current VAT registration threshold. The OTS have recently published their review and one of their findings was that, perhaps not unsurprisingly with all the talk of cliff edges, there are a large number of business “bunched” just below the VAT registration threshold, with a significant fall off in businesses trading just above the threshold.
The OTS review has outlined various options available in addressing the issues, although it has stopped short of making any firm recommendations. These options include dramatically increasing the threshold in order to take more businesses out of the VAT net, although this would have an obvious reduction on the revenues remitted to the Treasury. Much more likely, perhaps, is the option to dramatically reduce the threshold, bringing it into line with the norm around the EU, tipping more businesses over the VAT cliff edge and generating more money for Treasury coffers in the process.
The OTS have also made suggestions as to how the current VAT registration issues might be “smoothed” , including bringing in a tiered system of VAT registration, changes to the administrative process and possible changes to the existing flat rate scheme. However, it’s difficult to see how many of the options outlined would do anything other than add further layers of complexity, and therefore potential confusion, which would appear to fly in the face of their stated aim to “simplify” taxes across the board.
It remains to be seen which way the Government will jump on this issue and, of course, in the current challenging pre-Brexit environment they may well decide to keep the status quo, for now at least. But the issue is now firmly on the agenda and it would therefore not be a complete shock if the Chancellor acts quickly to implement some of the options highlighted in the review.