Government urged to examine vat threshold - here's what it could mean for your business

After a long-awaited review of the UK’s complicated VAT system, the Office for Tax Simplification (OTS) has recommended the government examines ‘the level and design of the VAT registration threshold.’ To recap, the UK’s current threshold of £85,000 is the highest in the EU - the average is £20,000.  So what could this review mean for hairdressing and barbering businesses? Many labour-based businesses, such as hairdressing, barbering and beauty, can operate on turnover below the threshold. In fact, around 55% of all UK small businesses are not VAT registered. However, the OTS has proven that trying to stay below the threshold can distort the growth of a business. The review considered some radical options. They included raising the threshold significantly, perhaps to £500,000 which would make VAT much simpler. It would reduce competition between business which pay VAT and those which don’t and lessen the amount of administration.  However, it would cut government funds by as much as £6bn per year. The report also looked at reducing the threshold from £85,000 to £43,000 which would generate up to £1.5bn per year, or even reducing the threshold to £26,000 (the national average wage) which would raise up to £2bn. While these measures would level the playing field between registered and unregistered small businesses, they would significantly increase business costs. Plus, they would create more administration. The OTS also considered options for reducing the ‘cliff edge’ effect of the current threshold.  At present, as soon as a business goes over £85,000 they have to pay VAT on all their turnover, not just the amount above £85,000. This immediately leaves a trader a significant £17,000 worse off. Hilary Hall, chief executive of the NHF, back this review. “In the current political climate, it’s unlikely that the government will want to make a radical change to VAT in next week’s budget," she explains. "However, we welcome the renewed focus on VAT and recognition that the current system is unfair.  We want to see a level playing field between businesses who do have to pay VAT and those who don’t.”