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VAT: how lowering the threshold could harm small businesses

Working out the Value Added Tax (VAT) and making sure that your business is complying with the VAT laws is time consuming for small business owners. In research conducted by the Federation of Small Businesses (FSB) it was found that small business owners spend a whole working week every year trying to comply with the obligations that come with VAT.

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There are multiple reason as to why VAT compliance takes an average of 44 hours (equivalent to 6 working days) annually.  Calculating the proportion of VAT owed is seen as the most time consuming part of dealing with VAT compliance, with four in ten firms agreeing that correctly working out the VAT of products takes a large amount of time. The other two most common problems include VAT returns and researching guidance.

The amount of time that small business owners are spending on their VAT obligations is leading money to be drained from the company. The two most important things a business owners needs are time and money, therefore the VAT process is a big hindrance to them. It is vital that when the upcoming autumn budget is revealed that the Chancellor doesn’t force more self-employed and small business owners into the VAT scheme.

Mike Cherry, FSB National Chairman, said: “VAT is the most time-consuming tax to deal with. Small firms and the self-employed spend days and days every year complying with their VAT obligations – time that should be spent expanding their businesses”.

It is clear that VAT is difficult to understand for most small business owners as only 5% found that the dealing with VAT was a relatively easy process, and 27% of businesses find it difficult to understand VAT with complicated sums that are incorporated into the tax.

The main reason that VAT is difficult to understand for small business owners is the different exemptions, with 53% of recipients flagging this as an issue. Some other issues that were highlighted by a number of businesses include different thresholds and establishing the rate at which the payment is required.

Mike Cherry also added: “A sudden drop in the VAT threshold would punish the smallest businesses and shift, rather than solve, the bunching issue. The registration cliff-edge remains a concern for many firms, but making huge swathes of businesses and the self-employed join the hugely complex VAT regime is not the answer. The Chancellor should be prioritising simplification, rather than expansion, of VAT and the tax system at large”.

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