As the Chancellor prepares to stand up and deliver his first and last Spring Budget speech on 8th March, he will be in a unique position says Tina Riches, national tax partner at Smith & Williamson.
At this point, the Chancellor can’t escape from the fact that he needs to demonstrate the UK’s post-Brexit fiscal capacity in the same month the Government prepares to invoke Article 50.
Everything will change after Brexit including the UK’s ability to raise taxes. At the same time he needs to keep a keen eye on the impact on tax revenue from even a small contraction in the economy. It will be interesting to see if Mr Hammond uses this statement to ‘steady the ship’ or whether it becomes a marker to show more imaginative tax policy development.
The most recent Smith & Williamson Enterprise Index highlighted that since June’s referendum result there has been a steady decline in entrepreneurs’ faith in the Government to support private enterprise. Hammond could give a huge incentive to small and scale-up businesses by lowering the VAT rate for those just above the VAT registration threshold’, says Tina Riches. ‘This would make growth more a series of gentle jogs than a short sharp sprint.
Currently, many small businesses selling direct to individuals deliberately keep their turnover below the existing VAT threshold of £83,000, because registering for VAT adds an immediate 20% to their prices.
A business with a 40% gross profit, that cannot increase its prices when registering for VAT due to the impact on demand, would have to more than double its turnover to make the same profit. A reduction of the VAT rate to 10% for businesses with turnover up to £120,000 would significantly lower the VAT registration barrier and provide a greater incentive to grow.
While this change would introduce another small barrier at £120,000, it would be far smaller than at registration as businesses would already be in the VAT system and therefore not face the hurdle of getting used to the administrative requirements.
You can follow Tina on Twitter for more budget commentary @TinaRiches1
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