Small businesses getting it in the neck!
The news about the increase of the standard rate of VAT is a real worry for many small business owners and based on the feedback I’ve had here on www.vatexchange.co.uk and from accountants, it really could be the last straw for many small businesses who are struggling to keep going in the recession with no help from the banks.
I don’t have any small business clients myself, but a couple of my accountant friends are specialists at advising small businesses and probably know more about VAT schemes for small businesses – such as the VAT Flat Rate scheme – than I do as they are dealing with them on a regular basis. I tend to get involved with small business issues when I get queries here on the website (see here http://tinyurl.com/2u9jhdg for a recent query about splitting up business activities to avoid VAT) or when my accountant friends contact me for advice about specific aspects of the FRS or other small business issues.
Many accountants with smaller business clients put their clients onto the FRS as a matter of course. It’s certainly worth it for most – a £100k turnover business can easily save £5k a year or more in VAT depending on the business profile and the VAT Flat Rate that is available.
One accountant has a client who is so determined to stay in the scheme that he (the client) wants to split the business up to keep the separate parts in the scheme …….well of course then you get into the disaggregation issues and either way, it all sounds like avoidance to me and (thankfully) the accountant.
But this whole VAT increase is a real doozie for very small businesses supplying retail/domestic customers – the addition of VAT to a quote for decorating or fitting a bathroom can mean the difference between getting teh job or not. Sometimes the mere mention of VAT on a quote puts prospective customers off even if there isn’t a lot between the “VAT exclusive cash” price and the VAT inclusive quote. And we all know that for every law abiding business who registers and charges VAT correctly, there is another round the corner who will do the work without charging VAT, legally or otherwise, to get teh work. Businesses whose turnover is below the limit are often stuck between a rock and a hard place, wanting to grow the business but put off by the cost of the VAT on their already low selling prices.
Unfortunately, I suspect that the rise in the standard rate will simply mean that more small businesses are tempted to try to avoid being registered for VAT. This is really frustrating from the point of view of an advisor because I know from experience that the time and effort involved in trying to avoid registration and then dealing with the issue once HMRC find out (and they normally do!) is always much more costly than the VAT that has been “avoided”.
Why don’t we have a reduced VAT rate for small businesses?
It’s about high time that the UK introduces a reduced rate of VAT for small businesses, ie those whose turnover is below £100k per annum and/or some sort of banding system so that smaller businesses aren’t put off growing over the registration limit just to keep out of the VAT regime. Other EC countries have such schemes, so why can’t we? Any cost to government income would almost certainly be minimial and in fact such scheme might actually reduce VAT avoidance in this part of the business world as there would be less incentive to avoid registering for VAT.
I know that this issue has been raised on several occasions by teh Federation of Small Businesses, the CBI and others but the government has always resisted. I just don’t know why. It might be the single most helpful thing that could be done to help small businesses – it’s not just the cost of the VAT that is a problem to them but the constant anxiety about it and the time and energy that they have to put into thinking about VAT that should be spent on their business. We know that 90% of the VAT revenue in the UK comes from 10% of businesses and it just seems ridiculous to keep such a barrier that affects hardworking business owners when a small change could make such a difference and with probably little effect to the tax revenue.
And a bit of an update to our home page!
Some of you might have noticed that we’ve introduced a new section on our front page, a monthly summary of major VAT issues and what’s new on the website, articles or queries on specific subjects. The world of VAT is pretty huge and of course we can only cover a limited amount of subjects here on the website. But over the couple of years since we launched, we’ve posted a lot of information including technical articles on complex issues such as property and place of supply, as well as practical advice in teh form of responses to queries on the forums, which you can find in the section concerned or by using the “Search” function. We are in the course of setting up a proper index to list technical articles on the site but in the meantime, we thought it would be helpful to summarise new stuff on the home page with links to the relevant pages to make finding new stuff a bit easier.
In the meantime, I hope you’re all having a busy and productive week.
Marie