Value Added Tax Bill — House of Commons, 2019-02-08
Topic: Macroeconomics
Robert Edward Jenrick (Conservative, Centre-right): Part of the time I am grateful to my hon. Friends the Member for Berwick-upon-Tweed (Anne-Marie Trevelyan), and for Erewash (Maggie Throup)—not "ear wash" as it was pronounced in the previous debate by my hon. Friend the Member for South Suffolk (James Cartlidge), who is the voice of small c conservatism in this place. The hon. Member for Ealing North (Stephen Pound) made a fleeting cameo appearance in the debate to recommend Barbara Castle, who I agree was one of the great politicians of the 20th century. Modern politics might have been different if she had been able to take forward the reforms that she set about in the late 1960s. Briefly—he is no longer in his place—my hon. Friend the Member for Harborough (Neil O’Brien) set out the twin pillars that any Conservative Chancellor must balance: sound money and respect for the public finances so that we do not leave the next generation worse off than we found it, and the liberating dynamic effect of lower taxes. Every Chancellor has the opportunity to balance the two responsibly and drive the economy forward, and that is very much the context for this debate The Government champion small business people and entrepreneurs, who are the backbone of our economy. A simple tax system helps those individuals and the businesses they create to operate in a productive and profitable manner, as we heard from numerous colleagues across the House. We want to find opportunities wherever we can to help them move their businesses forward. Under UK VAT rules, UK businesses must register for VAT once their total taxable turnover crosses the threshold, which is currently set at £85,000. Businesses can de-register if their turnover falls below £83,000. The Government recognise that accounting for VAT can be burdensome on small businesses, but it should not be over-estimated—our research shows that the cost to a small business of meeting its VAT responsibilities is generally around £300 a year. That is not inconsiderable, but it is perhaps not as much as some might suggest We want to maintain a VAT threshold that supports small businesses, and we do. As we heard from my hon. Friend the Member for Erewash, the United Kingdom’s VAT threshold is the highest in the European Union and the OECD. To put that in context, the EU average is €33,000, and $44,000 in the OECD. The German threshold is only £15,600, and ours is £85,000. We compare extremely favourably with our competitors around the world. That benefits 3.5 million UK businesses that are not required to account for or pay VAT—not half of all small businesses, but 60%. It is also worth noting the large and growing number of enterprises in the sharing economy, such as individuals taking up Airbnb businesses, generally below the VAT threshold, providing the kinds of services that might, in an era before the technology was available, be provided by VAT-registered businesses such as hotels and B&Bs Views on the right level at which to set the threshold are divided, despite the fact that it is, by international comparisons, very generous. Two years ago, the Chancellor asked the Office of Tax Simplification to examine the impact of making the threshold higher or lower. We did not prejudice that research; we asked the OTS to come forward with its views. Its report, published in November 2017—colleagues have quoted it today—found that the relatively high level of the threshold in the UK has a distortionary effect on business growth One reason for that, as we have already heard, is the "bunching" phenomenon, whereby small businesses limit their turnover to remain below the threshold. In the same way that welfare reform improves the ability of individuals to work extra hours or take a promotion, we do not want to discourage entrepreneurs from taking on an extra client, expanding their business or growing their sales. The bunching effect is significant, and raising the threshold somewhat, for example to £100,000, would not eliminate it; it would just move the problem further up the chain As a result of that report, the Chancellor committed to explore whether the design of the threshold could better incentivise growth. He launched a call for evidence in March last year, to understand the effects of the threshold on small businesses and ways of easing the burden once they become VAT-registered. During the call for evidence, businesses raised concerns, not dissimilar to those we have heard today, about the administrative and financial implications of registration, but there was no clear consensus on reform. That was not obfuscation of the kind alluded to by my hon. Friend; there was simply no clear answer on how to proceed. Numerous businesses wanted the threshold to be increased, and numerous wanted it to be decreased. The Chancellor therefore announced that the Government would maintain the threshold at its current level of £85,000 until March 2022, taking a balanced approach, with the UK continuing to lead the EU and the OECD in support for small businesses in this manner.