Below David McDonnell, VAT Director at MHA MacIntyre Hudson provides insight into the question, Is HMRC set to tackle the VAT cliff edge?

HMRC could be on the verge of making far reaching changes to the VAT system. The UK has far and away the highest VAT registration threshold of all EU Member States at £85,000. This is more than four times the EU average of £20,000 and a stark contrast to countries like Italy, Spain and Sweden where there’s no threshold whatsoever and VAT registration is effectively compulsory.

The high UK threshold relieves the administrative burden of VAT compliance for small businesses. It also creates very real net savings in not having to charge and account for VAT on income. However, this in itself can cause a problem.  Although many small and start-up business begin life outside the VAT “net”, as they grow they will likely need to register. They must then decide whether they can pass the VAT cost on as part of their existing pricing structure, or whether it needs to be adsorbed. This is the VAT “cliff edge” – one day your income is all your own and the next a sizeable chunk is payable across to HMRC.

One of findings of a review by the Office of Tax Simplification (OTS) was that, perhaps unsurprisingly, there are a large number of business “bunched” just below the VAT registration threshold, with a significant fall off in businesses trading just above the threshold. The review stopped short of making firm recommendations to address this, but options include dramatically increasing the threshold to take more businesses out of the VAT net. This obviously reduces Treasury revenues, so much more likely is a dramatic reduction in the threshold, bringing it in line with the EU norm, tipping more businesses over the VAT cliff edge and generating more money for Treasury coffers.

The OTS also made suggestions to “smooth” current VAT registration issues, including a tiered system of registration and changes to the administrative process. It’s difficult to see how these options would achieve anything other than add further layers of complexity and confusion, flying in the face of the stated aim to simplify taxes across the board.

Which way will the Government jump? In the challenging pre-Brexit environment they may decide to keep the status quo, for now at least.  But the issue is now firmly on the agenda and we shouldn’t be surprised if the Chancellor acts quickly to shake things up.

(Source: MHA MacIntyre Hudson)