EU lowering VAT rates threatens Britain’s army of small business owners.

There is talk this week of the EU lowering VAT rates to harmonise UK VAT rates! so that all rates are the same around the EU. Brussels apparently is looking to reduce the UK’s current threshold of £85,000 down to £76,700. If this happens after Brexit (assuming Brexit happens at all) then the UK will have to adopt the lower rate as it has lost it’s veto.

Staying below the vat threshold

Many small businesses intentionally trade below the VAT threshold. So that they do not have to put prices up to those who can not claim vat back. So that would potentially include any business that supplies the public. The price of your haircut and morning coffee may just be about to go up 20%. It’s less of a problem for business to business suppliers. Many businesses are already vat registered even if they don’t need to be.

If the EU lowering VAT rates does come into force then an option for the thousands of small businesses would be to stay under the new threshold. That would mean intentionally reducing sales turnover. To an amount below the new rate and losing around £8,000 in sales revenue. Expect some job losses as that could be the difference between keeping a member of staff on or not. Particularly a part time member of staff!

Premises based businesses

Those small businesses that work from premises are particularly vulnerable, that’s everything from hair and beauty salons to small cafe’s. Even mobile caterers etc. They have a higher cost base that needs to be covered within the threshold and I doubt any landlords will reduce their rent levels. I’m sure that a consequence of the EU lowering VAT rates for some of these higher overhead micro firms could be the last straw before throwing the towel in altogether. Certainly a lot of franchised businesses and their franchisors would need guidance on this. If franchisees have to reduce turnover then that reduces the franchisors royalty haul and therefore their profits too!

For HMRC this is another huge change to deal with, they are already under great pressure and the hundreds of thousands of potential businesses that are affected would have questions that need answering by their accountants or HMRC themselves.

We’ll have to wait and see what our government comes up with on this one!