The VAT threshold is to remain at £85,000 until 2022 until the terms of Brexit are clear.
In March of this year the government decided on a call for evidence into the current design of the VAT registration threshold as recommended by the Office for Tax Simplification (OTS). The main concern by this was that businesses were deciding to keep their turnover below £85,000 to avoid paying VAT in the UK.
The call for evidence showed that businesses were bunching (limiting their turnover to just below the threshold).
Through this call for evidence it found that 50% of unregistered businesses were doing just that to remain under the threshold. Some businesses would literally close their business or not work to do so.
The EU SME proposal gave leeway to businesses to exceed the threshold by 50% for 1 year but once they go past that they would need to register. If they go past the threshold by less than 50% past 12 months they would still need to register. The proposal system brought lots of concern that this would make things more complex for the VAT system.
Call for evidence procedure also proposed two administrative smoothing mechanisms:
1.Extending the first period for a business who must account for and pay their VAT obligations to 6 months.
2.Applying the threshold test over 2 years instead of one and is a test is to show whether the taxable turnover of a business went past £170,000 in 2 years rather than £85K in 1 year.
The feedback was generally positive although many did say the method did not go far enough. One representative body acknowledged that having a longer period to account and pay VAT once a business breaches the threshold, might ease the initial process of registration. However, the administrative side of VAT is still a burden and ongoing issue.
The government has concluded that there was not a lead option for reform although it understands that smoothing the mechanism to ease the financial burden of VAT registration would be to prevent further complexities.