VAT – raise or lower the threshold?

The Association of Independent Professionals and the Self-Employed (IPSE) has called for the VAT threshold to be increased, in response to a government consultation.

The current £85,000 threshold at which businesses must register for VAT has been frozen until 2020, while the government deliberates on its approach to the tax.

Chancellor Philip Hammond considered lowering the VAT-registration threshold before Autumn Budget 2017 to bring the threshold closer to global standards and the EU average of £20,000.

Estimates suggested that reducing the threshold from £85,000 to £43,000 would net the Treasury an extra £1.5 billion a year, while decreasing the threshold to £25,000 could fetch up to £2 billion.

More than half a million businesses currently below the registration threshold would need to register for VAT if it was lowered, according to the Office for Tax Simplification.

IPSE warned against decreasing the threshold, arguing this would “actively discourage” growth as well as forcing business owners to either raise prices or absorb the costs.

Instead, the organisation suggests raising the threshold annually in line with the retail prices index measure of inflation, which it says would incentivise growth and innovation in small businesses.

The comments came in response to the government’s call for evidence on the VAT threshold, which ran from 13 March to 5 June 2018.

Other suggested policy solutions include a “smoothing mechanism”, which would introduce the tax more gradually.

Andy Chamberlain, deputy director of policy at IPSE, said:

“Presently, the self-employed contribute £271 billion to the UK economy every year.

“Increasing the VAT threshold would create a nurturing environment for our smallest businesses to thrive, expand and further increase the overwhelming value they provide.”

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