20 March 2013

VAT — too hot to touch

Graham Elliott
Consultant | UK

Last year the Chancellor got his fingers burned by trying to handle hot pasties, not to mention the ‘caravan tax'. He had to pay a sweetener to the church lobby to fend off disaster for his misguided listed building alteration ‘reform'. VAT nearly destroyed his reputation in 2012. Was he going to risk bad luck on VAT in a year with a 13 in it? No.And so he did almost nothing with regard to VAT. Most of the announcements derive from treaty obligations relating to the coordinated VAT law of the EU. No blame can be attached to the government for these. So, why write a blog at all? It is because there was I think one quieter reform he might have attempted had he enough nerve, and which he should consider for next year, and that is freezing (or if he is courageous, reducing) the VAT registration threshold. This year he increased it by 2.6% (up to £79k). This is ‘on trend'. It means that fairly substantial micro-businesses, some of which make supplies to ‘final consumers' who bear the brunt of VAT, can escape it altogether. This saves them potentially a high proportion of the 20% by which their prices have to increase if they were registered. It also gives them a massive competitive advantage as against the person who turns over, say £85k. Indeed, depending on a business's cost profile, one might need to generate a turnover of £95k in order to replace the lost profits one enjoyed at £78k simply because of the VAT difference. That is a huge discrepancy (though admittedly it will usually be somewhat lower, particularly if the flat rate scheme is deployed). This does not incentivise small businesses to grow. It is arguably ironic that the government has offered a £2k flat reduction to wagebill taxation which incentivises small businesses to take on staff, given that the very staff who will be hired can take the hapless business across the VAT threshold, thus losing them several times that particular tax break value. So, doing nothing is not always the best option, though it is perhaps politically the safest. Not everyone will notice the disconnected policy that arises. It doesn't stand out like a hot and bothered Cornish pasty.

Graham Elliott Consultant | London

Category: Blog