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Office of tax complexification?

June 5, 2018

You have until a minute to midnight tonight (11.59pm on 5th June 2018) to comment on the Treasury’s call for evidence on the VAT registration threshold. (There’s a quick-and-dirty online survey you can fill in here if you haven’t got the time or inclination to read the whole thing.)

Now, this was published in March so why haven’t I commented on it till now? You may also have noticed that I haven’t been around here for a while. As I tried to explain to people who came to listen to me at Accountex a couple of weeks ago, it’s basically because the early drafts of this post started off as strings of expletives and then devolved into those random streams of letters you get when you bash your head repeatedly on your keyboard and plkfdje gjkiuht uhirsge whi4u5b

Ahem.

I am not a fan of this concept.  To put it mildly.

Here’s where we are, according to the condoc.

The threshold is a simplification measure that keeps businesses with a turnover at or below the threshold from having to register and account for VAT. This tax simplification benefits around 3.5 million businesses, over half of the UK business population.

Businesses with turnover below the threshold can choose to register for VAT, and there are approximately 1 million voluntarily registered businesses. Only around 1.2 million businesses (out of about 5.7 million total businesses) are above the VAT threshold.

To me, this is an “it ain’t broke” proposition. Small businesses don’t have to engage with VAT till their turnover is over £85,000 but they can if they want to and it benefits them.  A turnover of £85,000 is not, of course, a profit of £85,000 and it seems unlikely that a business with a turnover below that level is supporting more than one or two people from its profits.  Larger businesses object that the imposition of VAT distorts competition, but then they would, wouldn’t they.  The main driver for change seems to be the idea that the

relatively high level of the threshold has a distortionary impact on business growth. This is because of the phenomenon of ‘bunching’, where small businesses deliberately limit their turnover to remain below the threshold.

Personally I’m intensely relaxed about people being intensely relaxed.  You get close to the VAT limit, think “sod this for a game of soldiers” and take a month off.  And?  So?  Whose business is that?  Do you live to work, or work to live?

The consultation explains that the threshold will remain at its current level, but that the intention is to “consult on whether the design of the threshold could better incentivise growth.”

Well let’s see, shall we?

First, there’s an EU proposal to bugger about with the threshold to make it less of a cliff edge and yes I’m aware I’ve put several metaphors in a blender in this sentence but it’s that kind of proposal.  So instead of £85,000 = no VAT, £85,001 = VAT, the proposition is there would be a 50% cushion. If you blipped over the limit but by less than 150% of it as some kind of one off (one big order, say) then you would be ok, or if you went over the threshold by any amount but for more than one year then again you’d have to register.  There would also be a “union cap” of €100,000 turnover so countries couldn’t opt out by making their VAT registration limit infinity minus one, and there would be some fiddle faddling simplified invoicing stuff for businesses over the threshold but not over €2m turnover.

Is that better? Well, there are circumstances – the One Big Order scenario – where you might save money I suppose.  But your business growth would hardly be incentivised by the knowledge you could weasel your way out of having to do VAT if you faffed about with your turnover to keep under the 150% and one year rules, and your business admin would hardly be simplified by having to muck about calculating which scenario would leave you better off.  So no, Socrates, I do not believe this fulfils either the policy objective of incentivising growth nor the original policy objective of the high UK VAT threshold, of reducing the administrative burden.  It is a Bad Idea.  It is, moreover, a Bad EU Idea and what the heck are we faffing about with Brexit for if not to liberate ourselves from Bad EU Ideas?

Next (4.8 in the condoc) the OTS have suggested “administrative smoothing” and again (in 4.9 et seq) “financial smoothing”.  (Small pause for head bashing on keyboard again).  Repeat after me: options are not simplification.  Allow businesses six months instead of three to do their first VAT return, or allow them to use a two year period rather than one to compare their turnover to the threshold, or different rates of VAT for different levels of turnover, and they’ll just faff about trying to make the figures come out the way they want them to rather than just getting on with it.  If your policy objective is, seriously, “to change the behaviour of businesses that take measures to remain under the threshold” then just (a) declare the threshold is £100,000 and will remain unchanged for the life of this parliament and (b) invest a couple of million in employing customer service practitioners in HMRC to go out to businesses and offer to get them up and running with VAT as soon as they hit 90k and (c) carry on doing the stuff HMRC already does to combat the obvious splitting business type avoidance activity.

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