Thousands of small businesses stunted by VAT threshold

Thousands of small businesses stunted by VAT threshold - John K Philips
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Thousands of small businesses stunted by VAT threshold

According to data revealed through an FOI (Freedom of Information) request to HMRC (HM Revenue & Customs), an increasing number of small businesses in Britain are restricting their own growth in order to avoid the threshold for VAT (Value Added Tax).

The data shows that there was a higher number of SMEs (small to medium enterprises) whose revenue was approaching the VAT registration limit in 2018–2019 than four years earlier, and this number dropped significantly after the threshold had been crossed.

So, what does this mean for small businesses in the UK over the next few years?

Sole traders and companies deliberately limiting growth

The ‘think tank’ that submitted the FOI request to HMRC, Tax Policy Associates, suggests that 26,000 businesses – including sole traders, companies, and partnerships – were deliberately trying not to pass the £85,000 threshold for VAT registration in 2018–2019.

Avoiding the VAT registration threshold is particularly attractive to sole traders, as having to charge 20% tax on their goods and services can dramatically eat into their profits, in addition to the burden of complying with VAT returns and payments.

This is made evident by the figures from HMRC, which show that in 2014–2015, when the threshold was £81,000, there were about 7,000 sole traders within £1k below the threshold, and 4,000 within £1k above it. In 2018–2019, there were 8,500 sole traders below the threshold, and only 3,000 above it – an even larger drop.

This bunching before the threshold and steep decline after it creates a ‘cliff-edge’ effect, suggesting that the current VAT threshold is contributing to decelerated growth, putting the UK’s economic productivity behind its peers.

As inflation continues to drag more businesses over the line for VAT registration, it’s likely that we’ll see an increase in this bunching effect as more traders and companies try to suppress their growth to avoid this.

VAT threshold still frozen until 2026

Various analysts and tax experts have been putting pressure on the UK government to review the VAT threshold, which is responsible for its third highest tax revenue. As the current threshold allows businesses to operate on a smaller scale without paying VAT, it disincentivises growth, which also suppresses parts of the UK’s economy.

Suggested alternatives include raising the VAT threshold to allow potentially over a million smaller businesses to expand (which could in turn lose millions in tax revenue), or introducing a progressive VAT scale to phase it in from a lower threshold (for example, starting at 1% from £30,000 – a similar threshold to the EU – and only reaching 20% at £100,000 or above).

There are also suggestions for reduced VAT charges for businesses whose revenues are only just over the threshold, like the sole traders in the £85–86,000 bracket, or for a lower initial threshold with VAT rebates available up to 19%, proportionate to turnover.

Of course, all of these would require in-depth consultations and planning, taking the new Making Tax Digital for VAT online tax platform into account. Unfortunately, the UK government will not be doing this any time soon, as the Treasury has already confirmed that the current £85,000 VAT threshold and standard 20% VAT rate will remain frozen until 31st March 2026.

Defer VAT on imported goods with bonded warehousing

If you run a small to medium company which is affected by the VAT threshold, you don’t necessarily have to suppress your own business growth to avoid VAT. There are ways to allow your business to grow while complying with the burdens of VAT – especially if your business depends on imports.

When you import goods into the UK, you can temporarily store them in a bonded warehouse for as long as you need without having to pay VAT right away. It only becomes due when your goods leave the warehouse and enter circulation for sale in the UK market, allowing your business more time to prepare them for distribution and for effective cash flow planning.

To find out more about bonded warehousing in the UK, or to request a quote for our bonded warehouse services in North West England – which can also include logistics and tax management –  you can call John K. Philips on 01744 751 000. Alternatively, you can submit a contact form and we’ll be in touch to discuss your bonded warehouse enquiry.

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