Is the VAT registration threshold set to be reduced?

Currently only businesses with taxable turnover above £85,000 per annum are required to be VAT registered in the UK.

As part of their review into the UK’s VAT system, the findings of which are due to be released this week, the Office for Tax Simplification (‘OTS’) has been reviewing whether this current threshold should be retained.

The UK currently has one of the highest registration thresholds in the world, with only Singapore having a significantly higher level.

Although one of the options being considered would be to raise the existing threshold, taking many more businesses out of the VAT system, it seems much more likely that the recommendation from the OTS may be to reduce the threshold, therefore bringing many more businesses into VAT.

Initial reports of the findings of the OTS suggest that they are concerned that the existing VAT threshold is stagnating the growth of small businesses i.e. once they get up towards the current VAT registration threshold they slow down for the year, perhaps by closing for a month or not taking as many orders.

A solution which may therefore be recommended by the OTS would be to significantly reduce the threshold, perhaps as low as the current EU average threshold which is in the region of £25,000 per annum.

This would have a serious impact on small businesses, not only from a cost basis of needing to start adding VAT to their supplies, but also from an administrative perspective, in that they will need to start completing VAT returns. 

With VAT going to be the first tax to fall within the Making Tax Digital (‘MTD’) regime, any potential reduction in the threshold could result in many more businesses being impacted by MTD at an earlier date than expected.

Another potential recommendation may be for a smoothing mechanism that would take away the present cliff edge system, which currently can result in a business being over £14k a year worse off by going just £1 over the VAT registration threshold.  How such a system would work and whether this would actually be a simplification remains to be seen.

Exactly what the recommendations of the OTS are on VAT registration thresholds and other areas of consideration will be discovered later this week.  How then the government chooses to act on these recommendations will follow in due course, however with the Autumn Budget just a few weeks away, could we be seeing a shake up of VAT in the near future?

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