View VAT threshold cut as last resort, officials told

A last resort that even then should come with conditions is how lowering the VAT registration threshold should be approached, Treasury officials are being urged.

Further complexity, more burdens and losing out to rivals are the consequences for businesses if the approach is not taken, LITRG warned the officials in reply to a consultation.

The tax charity also said that the sheer number of “fundamental changes” already due to hit tiny companies made the idea of significant reform of the threshold ‘hugely concerning’.

In their submission, the charity pointed to Brexit and Making Tax Digital, but private sector IR35 reform is another rule-change that small enterprises face having to “get to grips with.”

So “lowering the registration threshold should only be considered if a smoothing mechanism can be incorporated into the VAT system” added LITRG, outlining it to be a sort of conditions-based, last resort.

“This should be in tandem with simpler VAT accounting and compliance requirements so that the additional administration a business must carry out on a day-to-day basis when it becomes VAT registered does not become too burdensome.”

It all comes after the publication last year by the Office of Tax Simplification of a VAT review, in which the government was recommended to explore the threshold level (£85,000).

The resulting consultation, which the Low Incomes Tax Reform Group (LITRG) has now formally replied to, has already attracted another alert against reducing the threshold by IPSE.

“If the threshold is set too low, this may entice some smaller businesses which might otherwise be compliant into the hidden economy,” said LITRG’s Anne Fairpro.

“This is due to the overwhelming burden that they perceive VAT compliance to be and because they do not feel they can be competitive in their industry if they have to charge VAT.”

The group also warned about the prospect of costs increasing for those VAT-registered traders with non-VAT registered clients, as they cannot reclaim VAT added to purchase costs.