In December 2016, the Office of Tax Simplification (OTS) were charged with looking at the VAT registration threshold and examining the’ issues and impacts which would be involved if the VAT registration threshold were higher or lower than at present’. Their finds, published in November 2017, were that the relatively high level at which the UK VAT threshold is set has a ‘distortionary impact on business growth’ as a result of ‘bunching’ whereby small businesses deliberately limit their turnover so that it remains below the VAT threshold. The OTS recommended that the Government examine the current approach to the VAT threshold. At the Autumn 2017 Budget, the Chancellor noted that while the Government were ‘not minded to reduce the threshold’ they would consult on its design. In the meantime, the VAT threshold was frozen at its current level of £85,000 for two years from April 2018.

A call for evidence was published at the time of the Spring Statement which,

  • Explores in more detail hoe the threshold may affect business growth;
  • Considers the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering; and
  • Considers possible policy solutions based on international and domestic examples.

Evidence is sought as to the extent that small businesses manage their turnover to remain below the VAT registration threshold, and whether it is the administration of VAT that puts a business off registering for VAT.

As VAT is a Europe-wide tax, while the UK remains a member of the EU, the changes that can be made to the VAT threshold are limited by EU law. EU law will continue to apply until the UK has exited the EU. The exit negotiations will determine the arrangements that apply once the UK has left.

Under the EU Commission’s SME VAT proposal (which aims to reduce VAT compliance costs for small businesses), the national threshold will be capped at 85,000 Euros (around £75,000) – considerably less than the UK threshold of £85,000; a threshold of 100,000 Euros (around £89,000) will be introduced for EU-wide supplies which once reached will mean that a business is not able to benefit from any national thresholds; and small businesses with a turnover of up to 2 million Euros (around £1,770,000) will benefit from simplification schemes increasing the return period to one year and removing interim payments. Comments are sought on the likely impacts of the proposal and how it will help to incentivise SME growth.

Consideration is also given to the introduction of smoothing methods to ease the transition from not having to deal with VAT to full VAT accounting.

Alternative Method of VAT Collection – Split Payments

The Government are seeking views on potential options for a VAT split payment mechanism to counter online VAT fraud, while at the same time further assessing the viability of split payment.

The growth of online shopping has resulted in significant losses of VAT. To meet the demand for rapid delivery, many overseas sellers store goods in the UK. Where the goods are in the UK at the point of sale, the oversea seller must register for VAT regardless of their turnover. However, many such sellers are not registered, or do not collect the right amount of VAT. A number of measures have already been introduced to tackle this problem. In March 2017, the Government published a call for evidence seeking views on the feasibility of a split payment collection method for VAT. The call for evidence found this to be technologically feasible.

A number of parties are involved in an online sale, including, potentially, a merchant acquirer, the customer’s bank, a payment service provider, a card scheme and merchant’s bank. The consultation explores who is best placed to extract the VAT from the gross payment and seeks support for the view that this is the merchant acquirer. The document sets out how the process could work in detail and seeks feedback on the proposed model. Feedback is also sought on how much VAT should be split from each transaction, and consideration is given to the merits of a standard rate split, a flat rate split and a net effective rate split.