A report by FSB calls for the Government to consider raising the VAT threshold from £85,000 to £100,000. They argue that this will remove a barrier to growth. The current freeze on the threshold has been in place since 2017, This means that more companies are being brought into the VAT system due to inflation. It is estimated that around 26,000 businesses are curbing their growth to avoid crossing the threshold. So, the argument goes, raising the threshold would increase productivity, capital, and employment in the economy. The report suggests allowing companies with sales between £100,000 and £120,000 to apply for a rebate on VAT. This would reduce gradually as turnover grows. The present VAT freeze is expected to bring in an additional £1.4bn a year by 2027-28. There is a counterargument, however, that a lower threshold should be considered to bring more traders into the system.
The imposition of VAT does put an additional burden on the ‘admin’ function. Is this outweighed, however, by the ability to reclaim VAT on purchases? Alternatively, does the absence of VAT on sales offer other options? For example, being able to offer more competitive prices or have greater margins? Would raising the threshold really benefit SMEs? The suggestion of a rebate on a sliding scale, however, looks cumbersome. Would this be automatically calculated through MTD?