Over 40,000 small businesses will cap revenue to avoid reaching VAT threshold
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Posted: Fri 24th Mar 2023
A total of 44,000 businesses will choose not to grow their revenue to avoid having to register for VAT, according to the Office of Budget Responsibility (OBR).
In the 2022 Autumn Statement, the government announced that the VAT threshold will be frozen at £85,000 until 2026. It has been at that level since 2017.
The OBR report said the freeze will raise £1.4bn a year in VAT revenues by 2027-28 with the number of firms entering the VAT system rising by 169,000 compared with indexing the threshold to RPI inflation.
It also said 44,000 businesses will opt for capping their turnover so that they don't reach the VAT threshold. This compares to 23,000 in 2017-18.
The OBR said:
"Given the administrative burden and pricing consequences of being subject to the VAT regime, the registration threshold creates an incentive for firms to cap their annual turnover just below it.
"And freezing the threshold while firms' turnover rises due to inflation means that over time, while more firms become subject to VAT and more revenue is raised, there are also more firms that pile up against the threshold by capping their turnover."
VAT threshold for business: should it be lower or higher?
Join an online debate on 14 February 2024 at 1.30pm. Sign up here.
Small businesses' view on the VAT threshold
We spoke to two Enterprise Nation members who said they are choosing to stay below the VAT threshold.
Stella Coombe, founder of Polyester and Forsocksake, said:
"I think the VAT threshold is definitely too low to justify the extra work required for my micro business and I will intentionally stay small to stay below it.
"I have a bricks and mortar shop, a website and a sock brand which I retail and wholesale over several platforms. I am a sole trader and I don't have any employees.
"Even setting the VAT threshold at £100,000 would make a huge difference for small businesses like mine where as a one-woman enterprise I already have so much work to do singlehandedly in keeping all the plates spinning."
Bryony Lewis, founder, T & Belle:
"As a sole trader operating an ecommerce retail company with tight profit margins during a cost of living crisis, being required to become VAT registered would present a huge challenge.
"As such, my future plans for the business are directly affected by the need to make sure that my turnover will not exceed £85,000 and therefore will involve deliberately restricting growth as I approach this figure.
"With the costs of everything from manufacturing to utilities, packaging and freight increasing year on year, small businesses need to turn over more money just to cover costs and make the same profit, before they can even consider growing their companies.
"I believe that the VAT registration threshold should increase much closer in line with inflation. Since 2014, the threshold has only increased by £4,000 yet considering cumulative inflation since 2014, £81,000 (the 2014/15 threshold) is equivalent to well over £100,000 today."
VAT threshold: What the government should do
A snap poll by Enterprise Nation found 79% of respondents believe the VAT threshold should rise to £120,000.
The issue is a complicated one however, as Enterprise Nation's response to a 2018 Treasury Select Committee highlighted.
Charlotte Thomason, Enterprise Nation's head of policy, said:
"The VAT threshold freeze risks putting a serious dampener on small businesses' desire to earn above the current £85,000 threshold. VAT registration is time consuming and adds an additional administrative burden to time poor businesses leaders. Many small businesses avoid reaching the threshold for this reason.
"If we want to encourage growth, the government needs to think about how they can best support businesses getting ready for VAT registration in the short term, and in the long term, to better understand how VAT threshold might prevent businesses reaching their full potential, whether that be at £85,000 or £250,000.
"We encourage Enterprise Nation members to get in touch to share their views on the VAT threshold so we can present the community's voice to the government."
To share your views on the VAT threshold and its impact of growth, email Dan.
Related resources
VAT threshold online debate on 14 February at 1.30pm
Enterprise Nation's Cost of doing business support hub
How to register for VAT: Guidance for start-ups
How to pay VAT: A guide for small business owners
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