New report recommends a comprehensive review of the VAT threshold with a view to reducing it from the current £85,000 level. Contributor Tom Purvis, Economic Advisor – IPSE.

IPSE, the Association of Independent Professionals and the Self Employed, has responded to a new review of VAT by the OTS (Office of Tax Simplification). Citing the average £20,000 level across the EU, the report suggests that the UK’s ‘high level … is having a distortionary impact on business growth and activity’.

IPSE has warned that significantly lowering the threshold – in the Autumn Budget or after – would be a disaster for the UK’s 4.85 million self-employed, one of the UK economy’s biggest competitive advantages. It would be perceived as part of a sustained attack on the UK’s self-employed.

IPSE’s Economic Advisor Tom Purvis commented: “Lowering the threshold for VAT registration would be a disaster for self-employed people, who have been the backbone of the UK economy in recent times.

“If the Chancellor adopts the OTS’s proposals, it would be seen as just another cash grab – part of a sustained attack on the self-employed. It would follow harmful changes to IR35 in the public sector, the introduction of dividend taxes and, most recently, the delay to scrapping Class 2 NICs. At a time when the UK flexible labour market is one of our biggest competitive advantages, we should be looking to promote self-employment, not stifle it.

“In the short term, lowering the VAT threshold would lead to serious cash flow problems for many self-employed people. They would quickly be faced with the stark choice of either raising their prices – which would cause them to lose customers – or absorbing the cost themselves, which would do significant damage to their businesses.   

“In the long term, it could actually discourage businesses from expanding over the threshold. Having a low threshold is also likely to create much more paperwork and administration for people at the lower end of the earnings scale.

“Overall, piling on the costs for the UK’s smallest businesses would not only cause the self-employed themselves serious problems; it would also do significant damage to the flexible labour market and, by extension, the wider economy.”