Understanding UK VAT and Spring Budget Impact on SMEs

The United Kingdom is just one of the many countries around the world that levies Value Added Tax (VAT) as a consumption tax on goods and services. It is the responsibility of a business to register for VAT and, once they do, most of their sales come with a VAT price tag.

Introduced in the UK in 1973, VAT has become a major revenue source for the government. Understanding VAT is crucial not only for grasping government income but also for comprehending the fundamentals of UK business and consumer behaviour.

Changes in VAT, such as those recently implemented in the Spring Budget by Chancellor Jeremy Hunt, impact government revenue, pricing, consumption habits, and, as we will unpick, support for the growth of the country’s SMEs.

How Does VAT Work?

VAT is a type of consumption tax that is added to the price of goods and services at each stage of production or distribution. This is as opposed to sales tax, which is imposed only at the final point of sale to the end consumer. Instead, VAT is levied at every step of the supply chain meaning businesses collect VAT on their sales and also pay VAT on the goods and services they purchase.

The VAT they pay will be charged to His Majesty’s Revenue and Customs (HMRC), the arm of the government responsible for collecting taxes.

How Is VAT Calculated?

 
Different rates of VAT can be added to products depending on the goods and services and how they’re used.

Unless goods and services are classed as reduced or zero-rated, where there is a 0% VAT rate, which encompasses items such as books and newspapers or children’s clothes and shoes, they are typically charged at the standard 20% VAT rate.

Besides goods and services, this could be charged on things like hiring or loaning goods to someone, selling business assets, items sold to staff or commission. These are known as ‘taxable supplies’.

Some goods and services are subject to a reduced VAT rate of 5% depending on what they are and how they’re used. This may apply to, for example, children’s car seats and sanitary products.

As mentioned, it is the responsibility of a business to register and become a VAT-registered business. In the UK, this is a requirement if their VAT taxable turnover is over a certain threshold. Previously, this was £85,000, however, Chancellor Jeremy Hunt has recently changed this figure to £90,000 – more on that later.

According to the government, as a VAT-registered business, you must fulfil the following requirements:

• Include the correct rate of VAT in the price of all goods and services
• Maintain diligent records detailing how much VAT you pay for things bought for your business
• Account for VAT on any goods you import into the UK
• Report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending a VAT return to HMRC, typically every 3 months
• Pay any VAT you owe to HMRC

To correctly calculate this tax, businesses may join VAT schemes to calculate and report the VAT you owe to HMRC.

How Does VAT Work For Small Businesses?

 
As a small business, self-employed person or even a small and medium-sized business (SME), you may not be earning enough for VAT registration to be a legal requirement if you are not reaching the VAT taxable turnover threshold. This is what is known as compulsory VAT registration. However, you may still be able to register voluntarily.

Small businesses must compulsorily register if their VAT-taxable turnover was more than the legal threshold in the last 12 months and must do so in the month they want over this threshold. Even if you simply expect your turnover to be over the threshold in the coming 30-day period, it is imperative you still register before this month is up.

However, you may also opt to register voluntarily. The benefit of this as a small business is that it means you don’t need to worry about notifying the HMRC when the time comes. It may also allow you to claim back VAT on professional purchases and could even boost your business profile, giving the impression you’re making a greater turnover.

Spring Budget 2024: How Changes In VAT Will Impact SMEs

 
The recent Spring Budget stayed relatively quiet on VAT, though Chancellor Jeremy Hunt did make one significant change: Raising the VAT registration threshold from £85,000 to £90,000. The government has explained the reason behind this is to support the country’s SMEs. It states that upping the threshold “will take around 28,000 small businesses out of paying VAT altogether.”

The government has also announced plans to support SMEs so they might further invest and grow through a £200 million extension of the Growth Guarantee Fund, helping 11,000 small businesses to access the finance they need.

While this is all part of the Chancellor’s aim to deliver lower taxes and more investment in an effort to “Budget for long-term growth”, not everyone is pleased and has fired back on how changes to VAT will affect SMEs.

Laurent Descout, Co-Founder and CEO of Neo, has reported to TechRound how the change feels more like a lack of support for SMEs, stating: “It is disappointing the Chancellor has not listened to the calls of SMEs for further support by bringing capital expenditure within the scope of the R&D scheme, which is already taking place in France and Ireland.

“Businesses are struggling to deal with soaring interest rates, late payments and difficulties accessing necessary funding. This decision heightens the uncertainty for the growth of tech start-ups and the UK’s position as a leading fintech and innovation hub.”

Similarly, James Robson, CEO of FundOnion – a specialist SME growth lending platform – feels SMEs are bound to feel neglected by current government policies and a lack of clarity: “Business leaders will certainly feel left out in the cold and undervalued by the Chancellor at a time when Government support and investment in UK small business growth is vital.

“Businesses need a Chancellor that supports long-term economic growth, enterprise, and innovation and is prepared to provide tax relief and incentives alongside greater access to alternative finance for quicker and easier funding.

“The ‘small gestures’ that were tabled are not enough to make a difference in the short term, let alone the long term. This was certainly a wasted opportunity to keep businesses on the side, especially at a time when their heads are being turned by Labour in the run-up to the election.”

Andrew Martin, who recently founded SMEB to provide banking services to small businesses in banking deserts, has also commented on the budget: “SMEs account for three-fifths of the employment and around half of turnover in the UK private sector, which is why it is so important the budget included key commitments to help SMEs continue to invest and grow.

“The VAT registration threshold will increase in April from £85,000 to £90,000 meaning that tens of thousands of businesses will not pay VAT, aiding SMEs under the threshold by reducing their financial and administrative costs and enabling them to grow. This is the first increase in seven years, thus the £5,000 increase is beneficial, but it does not fully offset this.

“We know that it is challenging for SMEs to access capital, which is why we welcome the announcement of the extension of the recovery loan scheme (changing to the growth guarantee scheme) and the addition of £200. This will crucially help 11,000 SMEs access the finance they need to invest and expand.

“The extension of the freeze on alcohol duties until February 2025, will benefit the 38,000 pubs, many of whom are SMEs.

“While we welcome the government’s support, critical areas remained unaddressed. There is great concern about access to banking services – which is not filled by the government’s Access to Cash programme. Private industry will need to plug the gaps left by today’s actions.”

Alas, as the upcoming election looms ever greater, it seems many up and down the country feel the Chancellors changes simply fall short of expectation. For all the promises of building a “brighter future”, has the current UK government ultimately failed to do enough to keep businesses on side?