VAT Threshold freeze causes growth squeeze for SMEs
A decision to freeze the turnover threshold at which businesses must register for VAT at £85,000 has led to many smaller businesses facing tough decisions on how they plan for growth.
Historically the threshold has risen in line with inflation. However, this has not been the case since 2017.
Had the threshold increased in line with recent higher inflation, the threshold from April 2023 would be around £103,000 – some 20 per cent higher.
This has led to what the Office of Tax Simplification (OTS) calls a ‘bunching’ of businesses just below the threshold in its latest study.
This trend suggests that some businesses are making stark decisions to stunt their growth to avoid hitting the £85,000 turnover threshold.
This freeze may, therefore, hamper business growth at a time when the Government has claimed that it is trying to improve business growth and productivity.
The types of businesses that are falling liable to the VAT threshold are also changing, with a growing number of sole traders in the service sector coming under its remit for the first time.
This is particularly true of hairdressers, plumbers and electricians all in the business-to-consumer (B2C) sector, according to the OTS report.
Registering for VAT can create new complexities for these businesses and make the services that they offer less competitive.
Whilst VAT-registered businesses can claim back some VAT, in some instances, they may not be able to add 20 per cent to their existing prices to offset registration without harming the viability of their business.
Do you need to know what’s best to do for your business regarding VAT? Speak to our team today for advice.