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Autumn budget announces two-year freeze on VAT threshold

Autumn budget announces two-year freeze on VAT threshold

It was widely speculated that Phillip Hammond would lower the small business VAT threshold to £50,000 in last week’s budget. However, the Chancellor announced that the current threshold will remain frozen at £85,000 for a further two years. This was a welcome break for small businesses and limited company contractors whose turnover is below the VAT threshold. Contracting Scout casts a professional eye over the proceedings.

Although the Chancellor’s reasoning for the freeze was that it would “give businesses certainty,” it’s probable that Hammond was reluctant to venture into what’s been described as “shark infested waters” in the lead up to Brexit. The Office for Tax Simplification (OTS) has previously pointed out that the UK has the highest VAT threshold in the EU, where the average is £20,000. However, when the OTS suggested a cut to bring the UK in line with other countries’ thresholds, it met with considerable opposition.

According to the OTS report published last year, reducing the threshold would raise up to £1.5bn a year. However, such a move would affect around 500,000 businesses. Mike Cherry, chairman of the Federation of Small Businesses, said: “Suddenly dragging more small firms into the VAT regime would be incredibly damaging, placing a huge admin burden on thousands of businesses and bringing them into the scope of Making Tax Digital by stealth.” Cherry is referring to the fact that the VAT threshold is also the dividing line between avoiding Making Tax Digital for VAT. This means that lowering the threshold would effectively pull thousands of small businesses into the digital tax scheme.

Such a move would also have wider repercussions on consumers if small businesses were forced to raise their prices in order to cope with possible cash- flow problems. Although Hammond has pulled back from lowering the VAT threshold at the present time, he made reference to the fact that the UK’s options are currently “restricted by EU law”. EU rules currently prohibit gradually increasing the rate of VAT the more that firms earn, as the EU wants a uniform system. However, the government says that they will look at a smoothing mechanism that could ease businesses into the VAT system once the terms of Brexit are clear.

Other industry commentators have suggested that the threshold was effectively cut as it failed to take inflation into account. Amongst bodies representing independent workers there have been calls for the government to increase the VAT threshold in line with RPI (retail price index). Andy Chamberlain, deputy policy director of the Association for Independent Professionals and the Self Employed (IPSE), warned that bringing more micro businesses, sole traders and freelancers into the VAT system would be “disastrous” for the economy in the lead up to Brexit. He stated that this would actively discourage them from growing their companies beyond the threshold, effectively inhibiting British enterprise while handing rival European firms the economic advantage.

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Find out more about the VAT threshold from Contracting Scout

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