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Small UK businesses plan to stay below the VAT threshold

One of the government’s advisors says small business owners are turning down work to avoid having to become VAT registered.

Since early this year, the Office of Tax Simplification has been reviewing the UK VAT system. The full report is due to be published this month, but details of the findings are already starting to emerge.

The review has uncovered some surprising facts, one of which is that many small business owners turn down work to ensure they stay below the £85,000 threshold.

In an interview with The Financial Times, Paul Morton, who is the tax director of the Office of Tax Simplification said:

“We hear that cruise ships are full of people staying below the VAT threshold.”

In effect, this means that some small business owners are deliberately restricting the rate at which their company grows to put off increasing their prices by 20%. In many cases, doing this almost instantly prices them out of the market entirely, because firms still below the VAT threshold can continue to offer cheaper prices. The only alternative is not to put the price up and absorb the cost.

As a result of this trend, the tax simplification study includes a review of the VAT threshold. There are several possible ways to tackle the issue, including introducing a smoothing mechanism to avoid the VAT cliff edge effect that is holding some firms back. Regardless of which solution is chosen, accountants from Liverpool to Edinburgh are sure to be kept busy handling what are likely to be big changes.

Posted by Peter
November 13, 2017
Small Business

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