Heads up... the VAT threshold could be coming down

All but sole trader 2
The VAT threshold

The VAT threshold is the level of income at which a limited company must legally be registered for VAT. Meaning that – at this level – that company would have to pay VAT on its sales. And that can have quite an impact on your take-home money.

Whilst the government has committed to a freeze in the VAT threshold until 2020, there’s a lot of talk on the streets (ask no questions, we’ll tell you no lies) that the chancellor might drop the threshold substantially in a couple of years’ time.

What does that mean for you? Let’s have a butcher’s…

What are the implications of VAT registration?

Well having to register for VAT is something many businesses seek to avoid. The majority would struggle to reduce their costs sufficiently to hide the impact of having to pay VAT on income. The alternative involves adding on 20% to your selling prices, so that would most likely affect your ability to compete in the marketplace. Added to that, there’s a fair bit of admin associated with submitting quarterly VAT returns (though this can be reduced if you hire a decent accountant).

You can claim VAT back on many of your purchases – but only up to the level of VAT you charge on sales – not beyond.

The maths is pretty complicated, but a company taking just under the existing threshold can stand to end up about £9,000 worse off (in terms of money to distribute amongst stakeholders) if its income grows that unwelcome few quid…

The UK's threshold

At the moment the UK’s VAT threshold stands at £85,000. Which is actually the highest of all EU member states, and one of the highest in the world. For a lot of small businesses or freelancers the threshold’s too high to be concerned with: for others it can come into play – particularly if their costs are reasonably high.

Some businesses go out of their way to avoid hitting the threshold – from illegal practices of hiding income, through to taking additional holiday to avoid unwanted sales! This whole practice of avoiding the VAT ‘cliff edge’, as it’s being called, causes a large number of businesses to hover just below the £85,000 level.

Place yer bets!

If the threshold were to be reduced drastically (rumours of a massive reduction to £25,000 are rife) it’d come into play for virtually all small businesses, and provide a lot of extra income for the chancellor to play with. Although it would seemingly promote a level playing field for SMEs, it would also remove the relief that small businesses and freelancers enjoy compared to companies with larger turnovers.

Other suggestions put forward have included raising the threshold drastically, or introducing a tiered system. However the former would provide the government with even less tax money, and the latter would further complicate an already-complex system and add to the admin burden. So these outcomes sit amongst the outsiders.

Best guess is that nothing will change and the threshold will stay where it is. With the government already focused on making VAT digital, the work required to introduce two major changes simultaneously might well prove impractical.

What should I do?

Watch this space – keep an ear out for any indications from the chancellor in the news.

And speak to us to better understand the impact of tax, potential rate changes – and how you can prepare for them.