The report by FSB is calling for the Government to consider raising the VAT threshold from £85,000 to £100,000. The argument is that this will remove a barrier to growth. Since the present freeze was introduced in 2017, more companies are being brought into the VAT system due to inflation.
It is estimated that around 26,000 businesses are limiting their growth to avoid crossing the threshold. So, the arguement 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 will bring in an additional £1.4bn a year by 2027-28. The counterargument, however, is that a lower threshold will bring more traders into the system thereby increasing Government revenues.
Whilst the imposition of VAT puts an additional burden on the ‘admin’ function, is this outweighed by the ability to reclaim VAT on purchases? Alternatively, does the absence of VAT on sales offer the options of being able to offer more competitive prices or have greater margins? Would raising the threshold really benefit SMEs? Must say the ‘rebate’ idea sounds a bit complicated too!