This week will see Britain’s new Chancellor
of the Exchequer, Philip Hammond, present his first ever Autumn Statement. I
suspect the word ‘growth’ will feature a lot. He will probably tell us the
economy will grow, and that it is largely through the efforts of this
Government that this will happen.
The Chancellor will no doubt list a whole raft of
measures he and his Government have, or will soon, put in place, allowing
businesses to grow, new businesses to emerge, and Britain generally remaining a
welcome nation to businesses locating here from outside. Whether we’re in the
EU or not. Rumour has it Corporation Tax will be reduced.
The Chancellor may even single out ‘my’
industry, tourism, as a major vehicle for his growth plans, and outline all the
‘fantastic work’ they are doing to help us. I am thinking LEP’s, (possible)
infrastructure investments, support for VisitEngland, etc. And no, I won’t
knock any of that, or indeed deny that these are important. They are!
Yet, no matter what initiatives we can
welcome, and what possible investment(s) we can expect, the impact small
businesses - of which there are many in tourism! - can make on the UK economy will remain stifled, unless one huge
barrier gets taken away, or at a very minimum, changed significantly: the VAT threshold!
As long as the UK keeps maintaining a VAT
system where there is a threshold, and that as soon as a business breaks
through this threshold, it becomes liable not just for the amount over the threshold, but for all
of its turnover (so the £83K included), many small businesses will make
a conscious decision to stay small. Because unless you are confident enough
that you will grow well beyond the level needed just to pay this additional
taxation, why take the risk? A quick sum shows that a business needs to jump
from £83K (current VAT threshold) to well over £100K in turnover just so it can
fund this (new!) VAT bill. Assuming the average business to operate around
the 5% profit margin, it becomes clear that for many, to make paying VAT a viable
prospect, they would be looking at growing well beyond £150K in annual
turnover, even taking into account scale advantages, etc. Many won’t be able to
do so, or indeed be prepared to take that risk.
So in summary: the VAT threshold as it
stands is a massive hurdle, effectively preventing many thousands of
enterprises from reaching their full potential, as both the cost and risk are
just too big. What a waste! And the solution, other than scrapping the
threshold all together, is straightforward: just remove VAT liability below the
threshold all together, for all businesses. If that means the threshold needs
to drop somewhat, or for Corporation Tax to reduce less, then so be it, but it
will mean that growth becomes attractive to all, opening a potentially huge
pool of additional economic activity to the UK economy overnight.
And sadly, it doesn’t stop there, as the
Government is just about to score its second own goal effectively stopping
the opportunity for growth for many: abolishing business rates for small
businesses. Where I am all for a major overhaul of business rates (Britain’s most
confusing and unfair tax?), what George Osborne announced in his final budget
earlier this year, to take some small businesses out of rates altogether, yet
keep in the ‘slightly less small’, is likely to repeat the mistake which is the
VAT threshold: a business may make the conscious decision to stay small!
Looking at what constitutes a business likely to qualify for the 100% Business
Rates discount, we are likely to see a group very similar to the ones (just)
below the VAT threshold. A double whammy if ever there was one. Why try and
grow your £80,000 or so a year business to £90K, £100K or even £125K, when
running it at £80K is more profitable?
Now just pause, and think of how many 1,000's of businesses are in this situation? Crazy, indeed!
Ruud Jansen Venneboer
Owner, Mazzard Farm holiday cottages (a small business above the VAT threshold)
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