According to recent data, a rising number of small British businesses are limiting their expansion to avoid surpassing the value-added tax threshold, putting pressure on the government to reconsider its stance regarding the UK’s third most lucrative tax. According to statistics received from HM Revenue & Customs via a freedom of information request, thousands of businesses maintain their yearly earnings below £85,000 to avoid having to register for or charge VAT.
According to the data, the number of enterprises having revenue before the threshold limit in 2018-19 was much higher than four years earlier and declined more sharply once it was surpassed. Analysts have warned that small businesses withholding money risk worsening low productivity. They have emphasised the necessity of reforming the UK’s VAT threshold, which is higher than in many of the UK’s peer countries.
Tax specialists could not determine what was causing the worsening “bunching effect” but cautioned that the tendency might grow as strong inflation drives businesses’ revenues above the £85,000 mark. “I believe this could be one of the UK’s most crucial tax policy issues,” said Dan Neidle, founder of Tax Policy Associates, which filed the FOI request.
He said it seems “possible” that the issue could contribute to the UK’s long-term productivity challenge, in which domestic product per hour worked lags behind France and Germany. The UK has a higher VAT registration threshold than any other country in the EU, which is around £30,000 on average. Neidle calculated that up to 26,000 sole proprietorships, corporations, and partnerships purposefully slowed growth in 2018-19, the most recent year for which data is available.
According to a chart published in 2017 by the Office of Tax Simplification, an independent adviser to the government on the tax system, there were approximately 7,000 sole traders with annual revenues of £80,000 to £81,000 in 2014-15, with revenues falling to roughly 4,000 for revenues within £1,000 above the threshold.
In 2018–19, the equivalent number of single merchants earning less than or more than £85,000 fell from almost 8,500 to 3,000. Avoiding the VAT threshold is appealing to sole businesses that provide services, such as builders or plumbers, or to individuals who rent furnished vacation rentals. When a company reaches the barrier, it must charge clients up to 20% VAT, which can eat into earnings if customers are hesitant to pay more. VAT registration and reporting can also be a considerable compliance burden for small businesses, which many prefer to avoid.
The present barrier of £85,000, according to Ben Lockwood, professor of economics at the University of Warwick, is “probably the worst of both worlds,” as it allows small enterprises to run fairly well without paying VAT while discouraging growth. The “holy cow” of the UK’s high VAT threshold has been “too much of a political nettle to grip,” according to John Cullinane, director of public policy at the Chartered Institute of Taxation.
He suggested that the government explore a “smoothing mechanism” in which a lower VAT rate is applied to enterprises that merely exceed the threshold by a certain amount. According to Anita Monteith, head of tax policy at the Institute of Chartered Accountants in England and Wales, a lower barrier would help SMEs and entrepreneurs deal with VAT registration.
The Federation of Small Enterprises has urged the government to raise the threshold to £100,000, which, according to its analysis, could help 1.4 million businesses expand. “We keep all taxes under review,” the Treasury said, “but… the present VAT registration threshold of £85,000 will be maintained at its current level until March 31, 2026.”
