VAT cloud looms after Spring Statement

When the Chancellor returned from the Despatch Box at the culmination of his first Spring Statement yesterday, the self-employed community would certainly be justified in feeling slightly more Tigger than Eeyore. Channelling his inner A. A Milne, the Chancellor made no immediate mention of IR35 and also announced two consultations: the first to tackle the “scourge” that is late payment, and the second on training for the self-employed.

While the overall mood of the statement was positive, a dark cloud now hovers over VAT. Last Autumn, the pre-budget discussion centred heavily around the possibility of lowering the threshold at which VAT is paid. Though it didn’t eventuate, in announcing the threshold would remain at £85,000 for two years while the Government consults on the design and level of VAT, the Chancellor had signalled his intention.  

And yesterday that intention became clearer when, ever so quietly, a ‘call for evidence’ was published on the Government website immediately after the Chancellor delivered his statement. It is important to stress that the Government announced a ‘call for evidence’ rather than a consultation, though the message it sends is still ominous: reducing the VAT threshold could very well be on the agenda.

The Government believes the threshold, currently £85,000, inhibits growth with too many businesses trading immediately below the limit. “The current design of the VAT registration threshold may be dis-incentivising small businesses from growing their business and improving their productivity,” read the Government’s statement. The problem with lowering the threshold to £25,000, for example, is that it doesn’t alleviate the issue, it exacerbates it. 

Take a self-employed hairdresser, for example. Presently, many hairdressers may be operating well below the threshold and are not, therefore, liable to pay VAT. If the threshold was reduced, they would face a stark choice between increasing their rates – at a cost to the consumer – or absorbing the additional costs themselves. And if neither of those options are appealing, or indeed feasible, then what incentive is there for growing their business beyond the threshold?

In any eventuation, there's little positivity to such measures. Increasing their rates runs the risk of losing clients, while absorbing the costs creates the potential for serious long and short-term cash-flow problems. And the only other option would be catastrophic too with many small businesses and the self-employed being actively discouraged from growing beyond the threshold.

On top of theses financial problems, it would also impose a heavy bureaucratic burden on those affected which would exacerbate the already significant administration demanded by self-assessments tax returns.

So, in times of great political and economic uncertainty, shouldn’t we be creating an environment for small businesses and the self-employed to thrive? When the self-employed contribute £271 billion to the economy every year – enough to fund the NHS twice over – we should be finding ways of utilising this cohort. After all they provide the UK economy with some of its greatest competitive advantages.

Though the Government stopped short of announcing a consultation in the Spring Statement, the under-the-radar nature of the announcement immediately sets a poor precedent. If the Government was so low-key in announcing the call for evidence, how inclined will it be to listen to the self-employed who will be so badly affected? The Government has made its intention clear, and with IPSE ready to respond accordingly, it’s up to them to show they are listening.

Meet the author

Tom Hayward

Senior Press & PR Officer