Many small and medium-sized enterprises (SMEs) are facing growth constraints due to a decision to freeze the VAT turnover threshold at £85,000.
In the past, this threshold has risen with inflation, but since 2017, it has remained stagnant. If it had increased with recent higher inflation rates, the threshold from April 2023 would have been around £103,000, a 20 per cent increase.
The Office of Tax Simplification (OTS) has found that this freeze has caused a “bunching” of businesses just below the threshold, forcing them to make difficult choices about stunting their growth to avoid surpassing it.
This development may harm business growth at a time when the Government is striving to improve productivity.
Additionally, more sole traders in the service sector, such as hairdressers, plumbers, and electricians, are falling liable to the VAT threshold for the first time.
Registering for VAT can create complexities for these businesses and reduce their competitiveness, as adding 20 per cent to their existing prices to offset registration may not always be feasible.
If you need support with VAT issues or have clients who are concerned about the impact that VAT registration is having on their business, please contact us.