CT: Rising prices creating a VAT risk for small businesses

CT: Rising prices creating a VAT risk for small businesses

Iain Masterton

VAT expert Iain Masterton has warned that escalating costs driven by inflation could jeopardise the survival of smaller businesses by pushing them over the current VAT threshold.

As the head of VAT at accountancy and advisory firm CT, Mr Masterton raises concern over the additional VAT burden, coupled with other escalating business costs, which is imperilling many micro-SMEs.

Mr Masterton urges the UK government to offer some pragmatic relief by increasing the current VAT threshold from £85K, unchanged since April 2017, or rethinking the VAT flat rate scheme for beleaguered businesses. He highlights that small hospitality and travel businesses, tradespeople, and other micro-SMEs are on the brink of closure after having to shoulder an additional 20% VAT on their income after exceeding the 12 month rolling threshold.

Mr Masterton said: “In this highly volatile economic climate, many UK businesses are struggling due to huge cost rises brought on by high inflation. Smaller SMEs are now facing a further hit as many are being pushed beyond the £85K VAT threshold.

“I have spoken with a number small hospitality and travel companies, tradespeople and even a small dance school operator which are concerned that the additional 20% VAT burden being added to their costs could force some of them out of business. This includes small holiday cottage operators, which are vital in supporting Scotland’s tourism sector.

He continued: “These companies are faced with three options: they can cease trading for the remainder of the financial year before they reach the £85K VAT threshold; they can raise their prices to cover the extra costs of being VAT registered; or they can swallow these additional costs. Each of these options is detrimental to their financial viability especially at this time of other cost rises resulting from this period of high inflation.

“The UK government can lend its support in two simple ways. Firstly, it could raise the current annual VAT threshold of £85K, which has remained unchanged since 2017, in line with inflation to help businesses offset the increase in costs. A further option is to simplify the VAT flat rate scheme and make it more generous to those sectors that are most feeling the pinch from being pushed beyond the VAT threshold.

Mr Masterton concluded: “Micro-SMEs make an important economic contribution, providing a living for hundreds of thousands of people throughout the UK and supporting many key UK sectors that rely on their goods and services.

“Reviewing the VAT registration threshold and other simplification options would not only be sensible and fair in light of rising inflation, but it would also ensure we prevent a raft of business failures and avoid the accompanying social impact of such an unfortunate scenario.”

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