Current VAT threshold poses threat to small business growth, FSB warns
The current £85,000 value-added tax (VAT) threshold is “stifling” small business growth, a leading industry support group has warned.
The Federation of Small Businesses (FSB) said today that an increase from £85,000 to £100,000 would be “key” to unleashing those who may be stuck in “economic firepower”.
Currently, businesses that exceed a taxable turnover of over £85,000 within 12 months, or expect to within the next 30 days, must register for VAT. The threshold remains in place until 31 March 2026.
But some 38 per cent of small firms with a turnover of £75,000 and £100,000 stress that it is a “barrier” to their growth, according to today’s report.
Tina McKenzie, FSB’s policy chair, said: “VAT compliance flattens small firms by stifling their growth and emptying their coffers. It’s crying out for a modern makeover to match today’s economic landscape.
“We can’t let it squash the ambitions of small businesses, strivers, and budding entrepreneurs.
“The flaws in our current system are glaringly obvious. We are at a breaking point – a drastic overhaul of VAT is needed.”
As part of what would be a “smoothing mechanism,” proposed for the small firms that just reach the threshold, the FSB said the HM Revenues & Customs (HMRC) should allow a reduction in annual VAT liability by a set amount, or offer a rebate option for those with a turnover of £20,000 above the threshold.
An HM Treasury spokesperson said: “We are helping small businesses grow, which is why we have taken one-third of business properties out of paying business rates whilst cutting bills for the rest by £4.3 billion.
“We have also effectively cut corporation tax to help businesses invest for less and simplified the tax system to save them time and money.
“The UK has a higher VAT registration threshold than any EU member state and the second highest in the OECD, which keeps most businesses out of VAT altogether.”
Richard Wild, head of Tax Technical at the Chartered Institute of Taxation, said the FSB report “takes a fresh look” at small businesses’ challenges within both the VAT threshold and rules.
He added: “In particular, the idea of a smoothing mechanism to reduce bunching just under the VAT threshold deserves serious investigation by Government.
“It’s six years since the Office of Tax Simplification undertook its review of VAT, and with the Government’s emphasis on growth, it’s time to take the issue out of the too-difficult box.”