Sole traders and the VAT-registration threshold

5th September 2018

Many small business owners and sole traders potentially have an advantage over larger players in the industry through not being registered for VAT.

Even though the VAT-registration threshold has been frozen at £85,000 until at least 1 April 2020, the prospect of being drastically reduced thereafter remains a threat.

After all, Chancellor Philip Hammond was reportedly considering reducing the sales threshold at which VAT is paid to as low as £25,000 prior to Autumn Budget 2017. 

The motive for lowering the VAT-registration threshold: raising an extra £1 billion for the Treasury through catching thousands of small firms and sole traders in the VAT web.

This idea has been put on the backburner for now, but what will it mean for you and your business if the idea is resurrected in the coming years?

Who’s affected?

Any future move to reduce the VAT-registration threshold will depend on what the threshold is lowered to. 

For instance, lowering it to £25,000 would force up to 1.5 million small firms into paying VAT at the time of writing, while between 400,000 and 600,000 would need to pay VAT if the registration threshold was lowered to £43,000.

Considering the UK’s small business population stood at around 5.7 million in 2017, around 27% of would be affected if the VAT threshold was to be lowered to £25,000.

How could it affect you?

If you’re unable to reclaim the VAT back effectively, your costs stand to increase by 20% and you risk losing customers if you try to offset that through increasing prices by the same margin. 

Many small businesses and trades, which specifically supply individuals, use not paying VAT as an advantage over larger players in the industry that have to charge VAT. This advantage will be lost.

It would actually be harder for one-man bands to adapt as the larger businesses can always use their bigger size to drive down material prices, which the smaller traders are unable to do.

Short-term effects could include serious cashflow problems for the self-employed, who would be faced with the dilemma of raising their prices or absorbing costs.

When would it take effect?

The Chancellor’s hands are tied until Budget 2019, which is the earliest he (or she if Hammond’s no longer in place or we have another general election) can tweak the VAT-registration threshold.

Therefore, the earliest this could affect small businesses would be 1 April 2020. 

Get in touch

If your business is booming and you expect to pay VAT in the coming years, contact us to discuss how we can help you or even manage these tasks on your behalf. 

You can call our experts on 0117 973 3377 or email