OTS's idea to lower VAT threshold 'a cash grab'

Severely reducing the VAT registration threshold would be a “disaster” for the millions of Britons who work for themselves, the chancellor was warned yesterday.

In an alert to Philip Hammond ahead of Autumn Budget, IPSE said that significantly cutting how much a trader can turnover before they have to pay VAT would be akin to a “cash grab”.

And it would not be the only raid on single-person ventures. “It would follow harmful changes to IR35 in the public sector [and] the introduction of dividend taxes”, the group said.

“At a time when the UK flexible labour market is one of our biggest competitive advantages, we should be looking to promote self-employment, not stifle it.”

 But the OTS, which has made 23 recommendations on VAT including a potential lowering of the £85,000 threshold, says its currently high level costs around £2billion a year.

“And evidence strongly suggests that many growing businesses are discouraged from expanding beyond this point,” OTS says. “Lowering the threshold might create less drag on economic growth.”

Elaborating in its new report, the office said that a drastic cut (£26,000 is exampled) would “significantly reduce the extent of the unregistered business population.”

In turn, this would reduce competitive distortions, and “make it harder for businesses that wish to illegally evade VAT to remain undiscovered.”

But IPSE countered: “In the short term, lowering the VAT threshold would lead to serious cash flow problems for many self-employed people.

“They would quickly be faced with the stark choice of either raising their prices – which would cause them to lose customers – or absorbing the cost themselves, which would do significant damage to their businesses.”   

The long term impact of a significant cut to the threshold (OTS also looks at snipping the threshold), is that businesses could be discouraged from crossing it, as they are now, warns IPSE economic adviser Tom Purvis.

“Having a low threshold is also likely to create much more paperwork and administration for people at the lower end of the earnings scale, “ he said.

OTS acknowledged: “[Lowering the threshold to, say, £43,000] would increase compliance costs for a large number of businesses and involve additional costs for HMRC in managing this increased population of registered businesses.”

Referring to its lead recommendation, which includes increasing the threshold (by a lot or a little), the office warned that “significant changes to the VAT threshold would have implications going much wider than the simplification of VAT” .

It added that those effects include “impacts on economic growth and productivity, on pricing, and the impact of VAT on those in different income brackets.”  

IPSE agreed, saying: “Overall, piling on the costs for the UK’s smallest businesses would not only cause the self-employed themselves serious problems; it would also do significant damage to the flexible labour market and, by extension, the wider economy.”

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