The bizarre world of VAT tweaks and small businesses

Last Updated on 8 March 2024

One of the smaller announcements by Jeremy Hunt in his budget announcement (6 March 2024) was that the VAT threshold is to be raised by £5,000.

It is £90,000 per year from 1st April 2024.

This refers to the threshold of 12-monthly turnover at which a business, including sole traders, must become VAT registered. If they don’t register at that point they attract a penalty charge.

So what?

That’s a good question! Historically the threshold used to go up by the inflation rate, to avoid dragging more small businesses into VAT.

Once you’re VAT registered you normally have to charge (typically) 20% extra, and you’ve become a tax collector.

Then, a few years ago, the VAT threshold got stuck at £85,000. Until the recent announcement it was likely to stick there until 2029. As prices go up with inflation more and more businesses would have been dragged into the VAT system.

So an increased threshold is good?

Possibly yes in the short term. Possibly no in the long term!

Small business groups have been lobbying to get the threshold to be £250,000, removing a huge number of small businesses from the need to become VAT registered.

Of course this would mean less money going to the Treasury, as VAT is a sales tax which brings a lot of money to the exchequer.

An increase to £90,000 is a small increase which nods in that direction. But doesn’t come close to making a substantial difference.

Bad move? Because…?

I was genuinely surprised when this was announced, as previous Conservative Chancellors have been dropping massive hints that the VAT threshold in the UK should come DOWN to the international average.

This would be around £25,000 per year.

They said that because small business often stop growing deliberately when they approach the threshold. This is because they don’t want to have to charge VAT when their close competitors might not be registered. They would be at a disadvantage over price.

You can see this effect in the data. The VAT threshold is an artificial and arbitrary cap on growth. Therefore, in the words of Philip Hammond in 2017 “bad for the economy”.

Of course if the threshold were £25,000 huge numbers of small businesses would then have to become VAT registered, including many sole trader freelancers.

You can see why that might not go down well before an election.

But if everyone is VAT registered there’s no competitive disadvantage, and no artificial cap on growth.

Is anyone happy?

I’m not sure if there’s a winner in this change. The system is just as perverse at £90,000 as it was at £85,000.

• The Treasury gets slightly less money, as a few businesses won’t have to be VAT registered.
• The small business groups are not getting anywhere near the increase that they asked for.
• Small businesses will stop growing just below £90,000, instead of just below £85,000. *shrug emoji*
• The Brexiters are fed up, because, y’know…Europe.
• I’ve just wasted 45 minutes writing about it.

Losers. All of us.

Predictions?

At some point the UK might adopt the international average threshold to avoid an artificial cap on small business growth.

My prediction is that nothing will happen until all small businesses start using digital tools to report income and expenses.

At that point the administrative burden will be vastly reduced and VAT could be sold to us all as minimal disruption. And “good for the economy”.

But don’t hold your breath.

Posted on 08 March 2024