Next April will be a key time in the life of VAT, as it reaches its 46th birthday in the UK. It seems to have been around for a lifetime longer than that. First it will have to cope with all the changes that our exit from the EU brings. At the same time HMRC is demanding that most VAT-registered traders comply with their new rules for Making Tax Digital (MTD). As if those two changes weren’t enough, the government is consulting on the benefits of a significant reduction in the VAT registration threshold.

Far be it for me to proffer a view on the impact that the UK’s exit from the EU will have on businesses. The government doesn’t have a clue what the terms of our departure will be and there is still a strong chance that we will end up with what the British public actually voted for – leaving Europe. Full stop.

MTD is going to make life very interesting for any business that is over the VAT registration threshold and registered for VAT. All such businesses, whether companies or self-employed traders, will have to keep their VAT records and complete their returns every quarter using digital software. If they don’t have it, but engage an accountant, he/she will have to do the online work for them. It applies from 1st April 2019 to any business that is obliged to be registered; interestingly those who opt to be registered, but whose turnover is currently less than the £85,000 mandatory registration level, can choose not to comply with MTD and keep their records/submit their returns as they have always done. Slightly bizarre, but that’s what the Treasury has elected to do.

MTD will be good for businesses

Once we’ve got over the initial hiatus, MTD will be good for businesses as it will improve their record-keeping and produce more management information to help proprietors to make informed decisions. It’s a shame that it takes a piece of government legislation to make some business owners see those benefits.

A change to the VAT registration threshold would have a significant impact on small businesses. The government is not threatening to tinker; it is planning a wholesale change. Options being considered include a reduction in the threshold to maybe half (yes half!) of the current level. The argument is based on the fact that our threshold of £85,000 is substantially higher than other countries in the EU/OECD, where the average level is £29,000.

If the threshold is reduced, logically it should increase the VAT take for the Treasury. However, there must be a risk that it will fuel the black economy and drive traders who will be competitively disadvantaged by the change to resort to measures that have largely become a thing of the past to manage their recorded turnover below the registration limit.

This would be a retrograde step and the government should think long and hard about such an impact. They have taken a strong stance to date in helping the smallest of businesses to minimise red tape and stay within the tax rules. Let’s hope they don’t bow to European pressure one last time!