VAT Threshold - SMEs Off the Hook

31 October 2018

Following calls for evidence by the Treasury’s Office for Tax Simplification last year, there were intimations that the Chancellor would look at lowering the VAT threshold for his 2018 Budget.

At £85,000 the UK’s VAT registration threshold is the highest in the EU (the average is around £29,000) and one of the highest in OECD countries.  Therefore, lowering the VAT threshold would not be difficult for the Government to justify.

Some business opinions are that the current high VAT threshold has become a barrier to growth as some small businesses manage their turnover in order to keep below the VAT threshold and seek to avoid the additional compliance and administrative burdens of accounting for VAT.  Some argue that SMEs want to remain competitive against their non-VAT registered rivals.

Representatives of small business have asked that, if the VAT threshold is lowered, that there is some type of smoothing mechanism to alleviate the ‘cliff-edge’ once a business exceeds the VAT threshold and transitions into a VAT-registered entity.

As it turns out, SMEs are off the hook for the time being, as the Chancellor in his Budget 2018 speech opted to freeze the VAT threshold at £85,000 up until 1 April 2022.  At that point, the Brexit terms should be clearer and Making Tax Digital will have progressed significantly resulting in shifts in the reporting and compliance landscape for businesses.  We can expect on-going discussions on the reform of the design of the UK VAT system and for future Budgets to revisit VAT registration thresholds.