The Low Incomes Tax Reform Group (LITRG) of the Chartered Institute of Taxation (CIOT) has called on the Treasury to resist pressure to reduce the VAT threshold from its current £85,000 until after the implementation of Making Tax Digital (MTD) and Brexit.

The call came after the Office of Tax Simplification (OTS) urged the Treasury to review the current threshold, prompting it to issue a call for evidence on the matter.

The level at which the VAT threshold is set is currently particularly sensitive as small businesses across the UK gear up for the introduction of MTD for VAT in April 2019, which will entail digital quarterly reporting using ‘designated software packages’. A lowering of the threshold would force even more businesses to comply with the new rules.

LITRG Chair, Anne Fairpo, said: “As VAT is based on a business’ turnover and not its profits, very many small businesses with low profits still find themselves having to deal with VAT on a day-to-day basis.

“We are hugely concerned that any lowering of the VAT threshold at this time could threaten seriously a small business’ ability to remain competitive in its marketplace if its trade is mainly with non-VAT registered customers.

“Lowering the registration threshold should only be considered if a smoothing mechanism can be incorporated into the VAT system to ease the tax cost and competition issues on crossing the threshold. Ideally, this should be in tandem with simpler VAT accounting and compliance requirements so that the additional administration a business must carry out on a day-to-day basis when it becomes VAT registered does not become too burdensome.

“We strongly believe that the prospect of a small business becoming a VAT registered trader is a daunting one for many and so may have the impact of stunting growth for some businesses.

“But if the threshold is set too low, this may entice some smaller businesses which might otherwise be compliant into the hidden economy. This is due to the overwhelming burden that they perceive VAT compliance to be and because they do not feel they can be competitive in their industry if they have to charge VAT.”

Link: Reduce the impact of crossing the VAT threshold before considering lowering it

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