Editor | 19 June 2018
Calls to increase VAT threshold

Calls to increase VAT threshold

The Association of Independent Professionals and the Self-Employed (IPSE) has called on the Chancellor to increase the VAT threshold from £85,000 to incentivise self-employed workers.

The plea was issued in response to a government consultation on the VAT threshold. 

This consultation was opened after the Office for Tax Simplification (OTS) suggested that the threshold should be lowered significantly to £26,000 - the UK’s national average wage. 

When he announced the consultation as part of the 2018 Spring Statement, Chancellor Philip Hammond raised concerns about a ‘VAT cliff edge’ and acknowledged that many businesses deliberately stifle growth to avoid paying VAT. 

In their response to the consultation, which closed earlier this month, IPSE said that raising the threshold would “stimulate small business growth and encourage innovation”. 

The self-employment organisation also warned that lowering the threshold would discourage more small businesses from growing and give EU businesses an economic advantage. 

IPSE’s Deputy Director of Policy Andy Chamberlain said: “The VAT threshold was effectively cut in the Autumn Budget in 2017 when the government stopped indexing it in line with RPI.”

He continued: “Increasing the VAT threshold in line with RPI would provide businesses with that much needed certainty as our imminent withdrawal from the EU approaches. 

“Presently, the self-employed contribute £271 billion to the UK economy every year – that’s enough to find the NHS, twice.”

The Association of Accounting Technicians (AAT) also responded to the consultation. They agreed with some of the wisdom behind the VAT threshold reduction, confirming that many small businesses manage turnover to stay below £85,000. 

The accountants’ organisation also warned against lowering the threshold, instead they called for measures designed to avoid the cliff edge of VAT. 

“We believe that the most appropriate way to address concerns that the current VAT threshold distorts taxpayer behaviour is to smooth the impact on businesses of crossing the threshold for the first time,” the AAT said. 

“Although reducing the VAT threshold may appear to be a simpler solution, it would result in unwelcome added costs and burdens for small businesses who suddenly find themselves above the VAT threshold, as well as adding to the tax burden on households in the form of additional VAT.” 

They advocated more nuanced smoothing mechanisms, such as an extension of the VAT Flat Rate Scheme, which is easier to manage for small businesses. 

In 2017, the Government announced that the VAT threshold would be frozen at £85,000 for two years from 1 April 2018. Any changed to the VAT system are likely to come after this date. 

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