We must not let government hoodwink the self-employed on VAT

This week, the Prime Minister bolstered the Treasury with some fresh faces. Calling it a ‘reshuffle’ may be overstating things – it was more like adding a few cards to government’s hand. 

But where big reshuffles can feel sometimes feel like arbitrary attempts to shake things up, this week’s mini reshuffle felt like a clear statement of intent that potentially radical tax changes are on the way.

In an announcement this week, the Chancellor confirmed that the Autumn Budget will be held on Wednesday 26^th November, framing it as one that “will turn to the long-term reforms Britain needs”, acknowledging that the economy is “not working well enough for working people.”

The government is in a bind – politically and economically. Having ruled out tax rises on ‘working people’ before being elected, and introducing an employer tax hike last year, the Chancellor’s options for raising more tax revenue for struggling public services are already very limited. Could reforming taxes – rather than raising them – be the answer?

The appointment of Torsten Bell MP to spearhead Budget preparations is good enough reason to believe that the Chancellor’s talk of “long-term reforms” feels like more than rhetoric. Bell, formerly Chief Executive of the Resolution Foundation think tank, advocated for radical reform to some key taxes before entering Parliament. 

Now, he has the best opportunity he’s ever had to make them happen, and it could involve big changes for the self-employed.

Sole traders are required to register for, charge and pay VAT once their annual turnover goes over £90,000. This threshold can put a ceiling on the ambitions of sole traders earning close to that amount; they may be reluctant to artificially increase the price of their services by 20%, giving customers and clients a reason to buy from competitors. For this reason, many choose to stop working part way through the tax year, keeping them below the threshold.

Organisations like IPSE have campaigned for this threshold to be dramatically increased, and recent reporting in the Telegraph suggests that the Chancellor is considering it. But government has increased it by just £5,000, after being frozen for several years. Even then, this doesn’t fix the problem – it just delays it a while longer.

One line of thinking suggests that, rather than increasing this threshold, government should cut it. And separate reporting in the Mail indicates that this too is under consideration, with the possibility of slashing it to as low as £30,000 – a figure previously pushed for by Bell and the Resolution Foundation.

This would make registering for VAT unavoidable for anyone whose main source of income is from self-employment, and then some.

It’s written in black and white in their manifesto: “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”

So, government cannot increase VAT without breaching this commitment. But cutting the VAT registration threshold is not the same as increasing rates of VAT – even if it ultimately ends up with more people having to charge and pay it. And if this radical reform did go ahead, this may well be how government justifies it.

But make no mistake – in IPSE’s eyes, it absolutely would be a breach of their commitment – and a breach of faith – to claim that dragging people into paying a new tax is not the same as putting their taxes up.

The Budget may be months away, but speculation is ramping up. As the UK’s dedicated not-for-profit membership organisation for the self-employed, we’ll be following developments closely and campaigning for a fair deal for you at the next Budget statement.

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