General Election 2017: Small businesses are calling on party leaders to simplify VAT

Helen Cahill
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Shoppers And Businesses Prepare For VAT Rise
The standard rate of VAT rose to 20pc in 2011 (Source: Getty)

Small businesses are calling on the party leaders to pledge to simplify the UK's "burdensome" VAT system ahead of the General Election.

The likelihood that any government would cut VAT is very slim. When the standard rate was raised from 17.5 per cent to 20 per cent in 2011, HM Revenue and Customs' VAT receipts jumped by nearly £15bn.

Changing the rate by even one per cent would cost the government around £6bn, said Julian Jessop, chief economist at the Institute of Economic Affairs.

Read more: VAT registrations soar after taxman closes £1bn loophole

However, the Federation of Small Businesses is calling on parties to simplify the tax because many small firms find calculating VAT "burdensome".

"Following the UK's decision to leave the EU, we believe the next government now has an opportunity to embark on a review over how this tax could be radically simplified in order to support greater investment, growth and exporting across the small business community," the FSB said.

Ben Baruch, policy adviser at the FSB, said VAT was "by far and away the most complicated tax to deal with", and that the administrative burden was having an impact on the growth and productivity of small businesses.

The Office of Tax Simplification, a branch of HM Treasury set up to give advice on reforming the tax system, has launched a review of VAT, but the FSB is arguing for a more "broad-ranging" analysis of the tax.

Stephen Herring, head of taxation at the Institute of Directors (IoD), said that a simplification of VAT would be welcome, and that the threshold for compulsory registration could be increased. Currently, firms must register for VAT if they produce a taxable turnover of more than £85,000.

Read more: The UK loses £1bn through VAT fraud and error on sites like Ebay and Amazon

Fourty per cent of FSB members think the VAT threshold should be increased. However, EU regulations block increasing the threshold beyond its current level.

Baruch said having a threshold might not be the right approach.

"For micro-business, you may not want to hit that threshold, and avoid growth in your business, because the perceived administrative burden with VAT registration perturbs a lot of businesses," he said. "Now is the time to be looking more long-term about how we can simplify the tax system after Brexit."

Instead, there could be more gradual, tiered stages of VAT.

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