By Mark Blayney Stuart Financial accounting and reporting VAT registration and the impact on accountants 11 Jul 2018 Not too long ago, the Office of Tax Simplification (OTS)reported on a perceived spike in number of companies whose turnover hovers just below the £85k threshold. This suggests that some SMEs are deliberately refraining from growing their business because the VAT cliff-edge is such a disincentive. “Some businesses limit expansion — for example by not taking on an extra employee, or an extra contract, or closing their doors for a period, to keep their turnover below the threshold,” the OTS was quoted as saying in the Financial Times, adding this was an “entirely legal practice”. In the past, Chancellor Philip Hammond has considered lowering the rate at which VAT is payable – after all, the UK is well out of line with the rest of Europe where the average turnover for starting to pay VAT is around £20k. However, this move is widely considered too unpopular to stomach; consequently, Hammond has evidently decided to go more gently. Instead of lowering the rate, a review is currently looking at ways of tapering entrance to VAT registration, aimed at removing those barriers to growth. Along the way, such moves should also reduce the temptation for businesses to lie about their turnover when they approach the £85k mark. The temptation is a very real one: with the current cut-off in operation, a business with an annual turnover of £85,000 can face a VAT bill of up to £17,000, whereas one with turnover of £84,000 would be exempt. Rounding the edges The changes are likely to be: freezing the level until 2020 at which VAT is payable; delaying VAT registration where a company’s turnover is below 50% of the VAT threshold for a period of 12 months; and creating a taper by allowing companies with a turnover of between £85,000 and £115,000 “to keep some of the VAT that would otherwise go to HM Revenue & Customs,” according to the FT. “While that would be a net cost to the Treasury, it could be offset by more economic growth if companies were no longer reluctant to cross the £85,000 VAT threshold.” These changes, if they happen, are likely to have significant effects on small businesses: some good, some bad. So what are the impacts on accountants – and what’s the inside view from the industry? “The freezing of the registration level is undoubtedly going to have an impact on businesses,” says Lucy Cohen, Commercial Director at Mazuma Accountants. “When you combine it with other rising costs that will increase their sales prices (such as minimum wage rises) we’re potentially going to see more people pushed into VAT registration far sooner than they otherwise would have been.” This may not be such a big deal for B2B businesses, Cohen argues, “but for B2C businesses this is going to be a real blow. That additional 20% on the sale price will either have to be passed on to the customer, making their pricing less competitive, or it has to absorbed by the business somehow, making their profits lower.” For many small businesses, lower profits means less money to take out as dividends or drawings. “There could be significant real-life consequences for small business owners as a result.” More positively, one of the proposals is to delay VAT registration in cases where turnover does not exceed 50% of the VAT threshold for more than 12 months. “This is potentially positive – if not slightly onerous to monitor for business owners,” Cohen says. “It may encourage businesses hovering just below the VAT threshold to take on additional work that may tip them into VAT, but gives them a grace period to gradually increase prices or revise their systems so that when VAT does apply, it is a far less traumatic beast.” While it does give them a bit of breathing space, is it just delaying the inevitable and making the process more complex though? “Yes – it may help small businesses, but it’s making an already complicated thing yet more complicated. Would a ‘ripping the Band-Aid off’ approach be better?” Pros and cons What about the impacts on accountants? “More VAT-registered businesses inevitably means more work for accountants – which in terms of opportunities for added value is a good thing.” However, for Cohen, the interesting element here is the psychology of what might happen. “If more people feel like they are pushed into needing an accountant rather than choosing one, then it could have a negative impact on the image of the industry. There needs to be a focus by accountants on how we can add value rather than just doing and filing the calculations – especially with MTD on the horizon.” What does Cohen think of the efforts to smooth the “cliff edge” on VAT – and do the current proposals go far enough? “On one hand, VAT remains a fact of business and something that accountants are well versed in and able to communicate to their clients about,” she says. “On the other hand, that ‘cliff edge’ can really hit businesses hard – especially if they haven’t registered in time and have to take the hit of back-dated VAT.” Cohen wonders if we are heading towards the point “where the view is just to say, ‘all businesses that turn over more than £10k should be VAT registered’? Should it just be made a fact of business life that you have to deal with VAT registration and level the playing field a bit for B2C businesses?” The dilemma is interesting. “Ultimately I’m not sure – but one thing I do know is that more complication in the rules is bad for businesses.” The risk of these proposals is that it gives companies “yet another thing to get mired in. That creates a deterrent from running a business that exceeds the threshold” – the very thing the proposals are designed to avoid. Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.