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Future of Retail Q1 2024

Making the VAT threshold fit for growth in modern small businesses

Accountant woman with documents and laptop working
Accountant woman with documents and laptop working
iStock / Getty Images Plus / CentralITAlliance

Tina McKenzie

Policy & Advocacy Chair, Federation of Small Businesses

Navigate VAT thresholds and tax challenges for UK small businesses. Find strategies for financial and economic success today.

Watching your business thrive brings personal and financial fulfilment, motivating further growth. However, in the tax system, there’s a crucial juncture where the journey can become tough: the VAT threshold. Beyond this threshold are additional costs and administrative burdens.

Raising the VAT threshold

In the Spring Budget, the Chancellor raised the level at which VAT kicks in for the first time in seven years, taking the threshold from £85,000 turnover to £90,000. This is welcomed, resulting from extensive campaigning by the Federation of Small Businesses to get the threshold increased, given that inflation has brought increasing numbers of small firms and self-employed people to the brink of the VAT precipice.

However, many small firms have surpassed that and had to accept the additional 20% tax they need to charge their customers and the average one week per year of additional paperwork for the tax authorities. In fact, 2.7 million businesses are registered for VAT in the UK. 

2.7 million businesses are
registered for VAT in the UK.

How VAT threshold negatively impacts businesses

For those coming close to the threshold, many are tempted to pull in and consider holding back their business a bit to avoid getting dragged into the VAT system. At a time when growth is much-needed in the economy, an element of the tax system, which disincentivises thousands of small firms from growing, requires greater change.

It cannot be right that a family-run fish and chip shop is staying shut two days a week for fear of revenues crossing into VAT territory and having to charge customers 20% more for their haddock and chips, nor that the owner of a small B&B should have to refuse bookings towards the end of the financial year as they stare at their annual revenue teetering towards the threshold. These are real-life examples.

Incentivising small firms with VAT adjustment

To make it less daunting, there should be some phasing when your revenue first reaches the VAT starting point — a discount or rebate for those whose revenue is within the first £20,000 beyond the threshold, for example. The threshold should also be linked to inflation so that firms aren’t caught in its net simply because costs are going up.

Small firms will be the key to the UK coming out of recession and a return to economic growth. The tax system should encourage that. It’s time to get VAT moving forward.

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