Calls for government to improve VAT system for SMEs

The government is being urged to overhaul the VAT system to help the UK’s smaller sized businesses with growth.

The Federation of Small Businesses (FSB) has published a new paper setting out ways to improve the VAT system for SMEs.

It pushes for a rise in the turnover threshold from £85,000 to £100,000, as this will ‘give firms stepping into the VAT-paying ring crucial breathing space, and an incentive to grow their turnover without fear of having to charge customers an extra 20% overnight’.

The FSB also suggests bringing in a smoothing mechanism for small firms, owner-managed companies and some of the self-employed who go just over the threshold, to ease the transition.

Commenting on this, Tina McKenzie, FSB’s Policy Chair, said, “VAT compliance flattens small firms by stifling their growth and emptying their coffers. It’s crying out for a modern makeover to match today’s economic landscape.

“We can’t let it squash the ambitions of small businesses, strivers, and budding entrepreneurs.

“The flaws in our current system are glaringly obvious. We are at a breaking point – a drastic overhaul of VAT is needed.

“Raising the threshold to reflect inflation, introducing a buffer to soften the blow for those just over the limit and demystifying the rules to save small business owners from a VAT-induced headache could unlock hundreds of millions in extra economic activity.

“As a country, we need to think about how to take VAT to the future.

“Our paper sets out a way forward that will help small firms and sole traders, from B&B owners and independent shops to plumbers and hairdressers.

“If the Government wants to show that it’s really on the side of small firms, a commitment to look at our suggestions and ease the VAT burden would go a long way towards that.

Richard Wild, Head of Tax Technical at the Chartered Institute of Taxation, added, “We welcome this report which takes a fresh look at the challenges faced by small businesses by virtue of the VAT registration threshold and the complexity of the VAT rules. In particular, the idea of a smoothing mechanism to reduce bunching just under the VAT threshold deserves serious investigation by Government.

“It’s six years since the Office of Tax Simplification undertook its review of VAT, and with the Government’s emphasis on growth, it’s time to take the issue out of the too-difficult box.”

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