VAT Registration

All businesses must register for VAT if their turnover of taxable goods and/or services is above a given threshold. This note discusses how the registration threshold has been set in recent years and the debate there has been about whether the threshold is too high or too low.

VAT is charged on the supply of all goods and services made in the course of a business by a taxable person, unless they are specifically exempt.  All businesses must register for VAT if their turnover of taxable goods and/or services is above a given threshold, which is currently £85,000.^[1]  Registered businesses may apply to be deregistered for VAT if their turnover falls below a second, lower threshold, which is currently £83,000.

Generally VAT is charged either at the standard rate – currently 20% – or the zero rate.^[2]  VAT is charged on the additional value of each transaction, and is collected at each stage of production and distribution.  A business pays VAT on its purchases – known as input tax, and charges VAT on its sales – known as output tax.  It will settle up with HM Revenue & Customs for the difference between the two.  In the end the cost of the tax is borne by the final consumer.

Reforming the registration threshold has been considered on two occasions in the last few years: by the Labour Government in the early 1990s, and by the Coalition Government in the context of its decision to increase the standard rate of VAT to 20% in January 2011. However, neither of these reviews resulted in any major changes.

For its part the current Government has taken the view that, “the UK’s current registration threshold achieves a reasonable balance between competing interests and reduces the administrative burden on the smallest businesses.”[3] In the 2017 Budget, as in previous years, the registration threshold was increased in line with inflation.[4]

In the Autumn Statement in November 2016 the Government announced that it had asked the Office for Tax Simplification (OTS) to carry out a review on aspects of the VAT system.[5] One of the issues the OTS was asked to consider was, “the issues and impacts which would be involved if the VAT registration threshold were either higher or lower than at present.”[6]

The OTS published an interim report in February 2017, asking for views on a number of questions; the authors noted that the registration threshold “seems to be having a distortionary impact on business population with an unusual number of businesses reporting turnover at levels just below the [annual turnover limit]” and asked if there might be “simplification benefits in having, for example, a tiered regime, or offering tax reliefs to reduce the cliff edge impact as many EU states have done?”[7] The OTS published a final report on 7 November 2017.[8]  

In its report the OTS looked at a variety of options for setting the registration threshold and recommended that, “the Government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.” Although the report noted that there was a case for substantially cutting the threshold, it also noted the downside to doing this:

Reducing the threshold from £85,000 to £43,000 (for example) would impact between 400,000 and 600,000 businesses. This would reduce the unregistered business population and competitive distortions, and make it harder for businesses seeking to evade VAT to remain undiscovered. It would also raise between £1bn and £1.5bn a year.

However, it would increase compliance costs for a large number of businesses and involve additional costs for HMRC in managing this increased population of registered businesses. It should be noted that significant changes to the VAT threshold would have implications going much wider than the simplification of VAT, including impacts on economic growth and productivity, on pricing, and the impact of VAT on those in different income brackets.[9]

In his Autumn Budget statement in November 2017 the Chancellor Philip Hammond welcomed the report, but did not announce any major changes to the threshold:

I am grateful to the Office of Tax Simplification for its recent report on the VAT registration threshold. At £85,000, the UK’s VAT threshold is by far the highest in the OECD. By contrast, in Germany it is just £15,600. I note the OTS conclusion that it distorts competition and disincentivises business growth. I also note the concerns of the Federation of Small Businesses about the cliff edge of the threshold. But such a high threshold also has the benefit of keeping the majority of small businesses out of VAT altogether, so I am not minded to reduce the threshold, but I will consult on whether its design could better incentivise growth, and in the meantime we will maintain it at its current level of £85,000 for the next two years.[10]

On 13 March 2018 the Government published a call for evidence to “seek views on whether the design of the VAT threshold could better incentivise small business growth.”[11] Subsequently, as part of the 2018 Budget the Government confirmed that “the responses to the call for evidence did not provide a clear option for reform”, so that it would “look again at the possibility of introducing a smoothing mechanism once the terms of EU exit are clear”; in the meantime the registration threshold would be “maintained at the current level of £85,000 for a further 2 years until April 2022.”[12]

Notes: 

[1]    With effect from 1 April 2017 (HMRC, VAT registration thresholds, April 2017)

[2]    A reduced rate of 5% is charged on a small number of supplies; for more details see, HMRC, VAT rates on different goods & services, May 2017.

[3]    PQ10779, 19 October 2015; see also, PQ54208, 30 November 2017

[4]    The threshold was increased by £2,000 in line with inflation by Order (SI 2017/290). See also, HMRC, VAT: registration thresholds: tax information & impact note, 8 March 2017.

[5]    Autumn Statement, Cm 9362, November 2016 para 4.43

[6]    OTS press notice, OTS publishes VAT review terms of reference, 8 December 2016

[7]    OTS, Review of Value Added Tax: Progress report and call for evidence, February 2017 pp4-5

[8]    OTS press notice, OTS publishes its first review of VAT, 3 November 2017. The OTS also produced a follow up briefing following press reports on their proposals.

[9]    Value added tax: routes to simplification, November 2017 p9

[10]   HC Deb 22 November 2017 c1055

[11]   Spring Statement – consultations, Written statement HCWS541, 13 March 2018. The deadline for responses was 5 June 2018.

[12]   Budget 2018, HC 1629, October 2018 para 3.70. see also, HMT, VAT registration threshold: Summary of responses, October 2018.