HMRC have issued 'VAT registration threshold: call for evidence' to explore whether the design of the VAT threshold should be changed.

HMRC have now published a call for evidence in relation to the VAT Registration threshold. It wants to understand:

  • How the VAT threshold is affecting growth, for example, by encouraging businesses to turn down work when the near the threshold.
  • What burdens are caused by the VAT regime at the point of registration and how this encourages businesses to avoid registering, including how VAT registration affects financial competitiveness or impacts profitability.
  • What possible solutions there are.

Included in the possible solutions are:

  • The EU’s SME proposal:
    • Businesses will be allowed to exceed the VAT registration by up to 50% for a single year without registering.
      • If they exceed this 50% cushion they must register immediately.
      • If they exceed the registration threshold, but by less than the 50% cushion for more than 12 months, they must register for VAT.
    • Simplification measures would be available for all businesses with turnover up to €2 million:
      • Simple invoicing.
      • Extend Annual Accounting.
      • No interim payments.
      • Simplified obligations for record keeping.
  • Administrative smoothing:
    • Extend the first period for which a business has to account for and pay their VAT to 6 months, from 3 months.
    • Apply the VAT threshold test over 2 years rather than 1.
  • Financial smoothing:
    • Gradual increases in VAT payments. Finland starts with 0% VAT at €10k turnover to 100% VAT at €22,500 turnover. Netherlands does not require payment of VAT for business with a bill of €1,345 or less, and it increases gradually to 100% at €1,883.
    • Different thresholds for different sectors. France and Ireland have lower thresholds for services than goods. In Australia, all taxi drivers must be registered.
    • VAT should work in the same way as income tax, with different bandings and rates.

This call for evidence will run until 5 June 2018 and follows an earlier review by the OTS.

The OTS published its first review of VAT, ‘Value added tax: routes to simplification’, which offered a number of recommendations.

One of the recommendations was to review the VAT registration threshold:

  • The cliff-edge approach causes bunching and discourages growth.
  • A smoothing or change in threshold should be considered.
  • The UK has the highest turnover threshold in the EU and in the OECD.

In the subsequent Autumn budget, the Chancellor confirmed that the VAT threshold would not be reduced for the time being, but it would be frozen for two years from April 2018. This would mean the VAT threshold could be changed one year after Making Tax Digital for VAT commences. The Chancellor also confirmed that they would consult on the design of the threshold.


Registering for VAT

Making Tax Digital: VAT

OTS and EU conduct separate reviews of VAT

VAT: annual accounting

External link: VAT registration threshold: call for evidence


The current VAT Threshold and the impact on The current VAT Threshold and the impact on business growth:

1. What experience or knowledge do you have of small businesses managing their turnover to remain below the VAT threshold?

2. Are there, in your experience, particular types, regions or sectors of businesses where this is particularly prevalent?

3. What is your experience of competition challenges faced by registered traders just over the threshold, compared to unregistered businesses? If challenges exist, what effect do they have on the ability of registered businesses to grow?

4. As the OTS suggest, does the current threshold contribute to the size of the hidden economy, and how?

5. In your experience, does the current threshold have any effect on growth and/or productivity? If so, how significant is that effect?

In your experience, does the current threshold have any effect on growth and/or productivity? If so, how significant is that effect? Administrative Burden

6. Does the administration of VAT discourage businesses from registering?

7. If so, what are the main aspects of VAT administration that are putting businesses off registering

8. For businesses that have gone from being unregistered to registered, is there a difference between the perception and reality of VAT administration? Was the administration easier or harder than anticipated?

  • If harder, why was that? (For example, a struggle to understand whatyour obligations were, or you made mistakes).
  • If easier, why was that? (For example, received the right support fromHMRC, at the right time).

9. How well do current simplification schemes address these issues?

10. Ipsos MORI research suggests that dealing with VAT returns are likely to be the most time consuming aspect of VAT administration. What is it about VAT returns that are particularly time consuming for small businesses?

11. Will new technology, such as the introduction of MTD, facilitate changes or simplifications in VAT administration? If so, what are they, and what changes would you like to see in response?

Financial and Competitive

12. In your experience, what, if any, are the sectors that are particularly affected by the financial costs and competitive disadvantages of registration discussed in 3.15-3.20?

13. In your view, do these financial costs and competitive disadvantages lead to businesses managing their turnover below the threshold? How significant is this effect on SME growth?

EU SME proposal

14. What in your view would be the likely impacts of the EU’s proposal on the administration of VAT for SMEs, and how in particular will it help incentivise SME growth?

15. Are there constituent parts of the proposal which are particularly attractive or unattractive? If so, what are they and why?

Administrative smoothing

16. Do you think the mechanisms described in paragraph 4.8 would help businesses better manage the administration of VAT, upon registration? If so, would the positive effect be significant?

17. Would any of these solutions be sufficient to change the behaviour of businesses that take measures to remain under the threshold?

18. Are you aware of any simplification schemes from around the world, that work particularly well? If so what are they?

Financial smoothing

19. What is your experience of the type of mechanisms outlined in paragraphs 4.10-4.15? Would they be effective in incentivising business growth in the UK? If so, how and why?

20. In your view, are there any other solutions that could work? What are they and why would they work?

21. The EU Commission SME proposal introduces the idea of essentially two thresholds. The first, lower threshold exempts small businesses from the financial obligations of VAT. The second, higher threshold exempts slightly larger businesses from some of the administration of VAT. What do you think about this proposal?

22. Assuming the UK has the freedom to do so, would increasing or decreasing the threshold simply move the threshold problems or alleviate them?