VAT Shake-Up Puts Pressure on Small Business Finances
28th March 2018.
Lowering the revenue level at which a company is liable for VAT could create further financial distress for small businesses.
Earlier this week, MPs on the Treasury select committee began an investigation into the Value-Added Tax (VAT) policy for businesses around the UK. Small businesses are currently escaping the tax by reigning in sales to keep below the 85,000 threshold, but change may be forced upon them. The government is concerned that this legitimate effort to avoid charging higher prices is discouraging growth and stopping businesses from contributing to the health of the economy.
In response, the government has announced plans to reduce the threshold to 25,000 which could hurt small businesses even harder. Business owners will soon be faced with the choice of either losing customers through price hikes or absorbing the tough fees themselves. These businesses are the lifeblood of our economy and their route to growth does not lie with the taxman.
When growing your business you need cash, something which under this new VAT shake-up could be more difficult for SMEs. This lower threshold could leave small businesses more valuable and even further away from expansion than they were before. While high street banks were once the assumed route for financing expansion projects, there are now alternatives. At the Credit Protection Association, our debt recovery services have uncovered the funds that our members have used to expand their business. Unlike borrowing from a bank, our services merely return debt that is owed to our members, improving their financial position rather than burying them under exploitative interest rates.
The Association of Tax Technicians has expressed their concern about the reduction of the VAT threshold. The ATT has shown particular displeasure with the timing of the proposal, a time when small companies are dealing with the introduction of digital tax records and new reporting requirements, as well as uncertainty surrounding Brexit.
Some “smoothing” options being discussed by the Treasury include applying the threshold test over two years instead of one. For instance, a business would have to collect VAT only if it turned over £170,000 over two years instead of £85,000 in one.
Other potential sweeteners include allowing businesses a form of relief on their first VAT bills, which would decrease over time.
The Treasury VAT consultation is open until June 5th.
Small businesses must be encouraged to grow, and this sentiment is sewn throughout this VAT shake-up. While there are businesses within the economy who are too timid to grow beyond their foundations, this new proposal could hurt those who are not able to. Many small businesses are heavily reliant on economic dips and blips, and lost customers and higher fees will be felt strongly. It is therefore important that business owners know their options, know that expansion does not correlate with a tax threshold but with freeing cash flow.
At the Credit Protection Association, we aid many of our members with expansion projects. When expanding your business, having bad debt or unpaid invoices can only damage your financial future, so clearing out your cash flow becomes an essential first step. Even if this VAT shake-up does go ahead, our credit control skills get any owed funds paid straight back to our members so they can immediately concentrate on their business.
When it comes to expansion, the power lies with the business owner, not with the taxman.