Budget 2017 and VAT

There was very little of general application, in the Autumn Budget 2017, on VAT.

Before the Budget, on 22 November 2017, there were rumours that the Chancellor would lower the VAT registration limit to £20,000 following reports in newspapers that seemed to take elements from the Office of Tax Simplification (OTS) report on simplifying VAT and using them to create scare stories.

The Chancellor announced that the VAT registration limit is to stay at £85,000 for the next two years. This delay is to give time for HMRC to look at the comments in the OTS report and consult on the issues. Whilst there is no change in the VAT registration limit, the impact of the freeze will be to reduce it as inflation will eat into its value. Small businesses that are on the cusp of registering for VAT will find it harder to hold their turnover just below the VAT registration limit. If they are to maintain the levels of profit they need to support their business and lifestyle, they will have to increase their turnover and become VAT registered.

The impact of registering is felt most by those businesses that are supplying goods and services to consumers. These businesses will have to set prices the marketplace will bear, which means they have little scope to raise their prices. The effect is that one-sixth of their income will become output tax — the VAT on sales — and their profit margin reduced by this amount. There is some offset as they will be able to offset their input tax — the VAT on purchases. To return to their before VAT registration profit levels, they will have to increase their turnover by as much as £17,000 a year, just to cover the VAT. The impact of increases in costs will also affect profit levels.

The OTS report suggested considering changing how VAT impacts newly registered business in an attempt to reduce the adverse effects that are holding back business’s expansion plans.

I anticipate that there will be more enquiries by business owners about business splitting in an attempt to stay out of the VAT club. Seek advice before you take any steps to split a business. HMRC has powers that allow it to direct that two or more persons be treated as one for VAT registration.

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