Policy paper

VAT: maintain thresholds for 2 years from 1 April 2020

Published 29 October 2018

Who is likely to be affected

Businesses whose turnover, or total EU acquisitions, are close to the existing VAT registration threshold of £85,000.

General description of the measure

The VAT registration and deregistration thresholds will not change for 2 years from 1 April 2020.

The taxable turnover threshold which determines whether a person must be registered for VAT, will remain at £85,000.

The taxable turnover threshold which determines whether a person may apply for deregistration will remain at £83,000.

Policy objective

The Office of Tax Simplification (OTS) report published on 7 November 2017 recognised the distortions the threshold causes and recommended the government should review this.

A lead option to address the distortionary effect is to lower the threshold, however the government is resisting such a move because a high threshold keeps the majority of UK businesses out of VAT altogether.

The government published a call for evidence on 13 March 2018 inviting views on the effect of the current threshold and what policy options could better incentivise growth.

Responses to the call for evidence have not provided a clear option for reform.

Concerns raised by the OTS around the threshold still stand, therefore, it is being maintained at that level for a further 2 years.

The government will look again at the possibility of introducing a smoothing mechanism once the terms of EU exit are clear.

Background to the measure

The UK’s VAT registration threshold (above which persons making taxable supplies are required to register and account for VAT) is currently set at £85,000, although businesses can opt to register voluntarily if their taxable turnover is below this.

The deregistration threshold for taxable supplies, currently £83,000, is set lower than the registration threshold to avoid businesses trading around the threshold level having constantly to register and deregister.

It is the highest threshold in the EU and OECD. It keeps an estimated over 3.55 million small businesses out of VAT, but evidence suggests that it also distorts competition between businesses which have to charge VAT and those who do not.

A previous measure to maintain the current registration and deregistration thresholds until March 2020 was announced at Autumn Budget 2017.

The Office of Tax Simplification report published on 7 November 2017 recognised the distortions the threshold causes and recommended the government should review this.

The government published a call for evidence on 13 March 2018 inviting views on the effect of the current threshold and what policy options could better incentivise growth.

A summary of responses has now been published. The responses provided do not present a clear option for reform. While concerns about the effect of the threshold remain, the registration and deregistration thresholds will be maintained for a further 2 years until 31 March 2022.

Detailed proposal

Operative date

The thresholds will be maintained at their current level for 2 years from 1 April 2020.

Current law

Current law is included in Schedules 1 and 3 of the Value Added Tax Act 1994.

Proposed revisions

There will be no revisions to existing legislation, and no new legal provisions will be introduced.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
-	-	+ 60	+130	+ 145	+ 150

These figures are set out in Table 2.1 of Autumn Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2018.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

The measure has no impact on individuals or households as it only impacts on businesses.

There is no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a significant impact on businesses with turnover just below the VAT threshold. Maintaining the current threshold levels is expected to result in approximately 11,000 additional small businesses (or 0.4% of unregistered businesses) having to register for VAT by the end of the 2020 to 2021 financial year and 22,000 businesses (0.7% of unregistered businesses) in total by the end of the five year scorecard period. This is out of a total business population of 5.7 million at the start of 20182018 as estimated by the Department for Business Energy and Industrial Strategy.

The one-off implementation cost to businesses entering the VAT system over five years is estimated to be negligible. The total ongoing administrative burden for the small business population of accounting for VAT will increase by £8 million per year.

Estimated one-off impact on administrative burden (£m)

One-off impact	£(m)
Costs	negligible
Savings	-

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact	£(m)
Costs	8
Savings	-
Net impact on annual administrative burden	+8

Operational impact (£m) (HMRC or other)

HMRC will incur extra staff costs to implement this change estimated at £890,000 over 5 years.

Other impacts

Justice impact test: judicial impacts are expected to be negligible.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from tax returns and receipts.

Further advice

If you have any questions about this note, contact Steven Williams on Telephone: 03000 572 469 or email: [email protected].