EASING THE IMPACT OF VAT ON SMEs

The Government is proposing to introduce a major package of measures from April 2001 to allow small firms to manage their entry into the VAT system, reduce their VAT administration burden and improve their cash flow. The package will include:

extending the benefit of the cash accounting scheme to 40,000 traders by expanding the turnover limit from £350,000 to a new consolidated SME turnover level for VAT of £600,000. This will help more small and medium sized enterprises (SMEs) manage their VAT, whilst easing their cash flow burdens.
allowing at least 100,000 more businesses to benefit from lower compliance costs through the ability to file VAT returns on an annual rather than quarterly basis. The upper turnover limit for qualification will be raised from £300,000 again to the new consolidated SME turnover level of £600,000.
providing better advice for SMEs, through launching a lifelong business support programme and a national contact centre for general enquiries, extending the national importers and exporters programme and developing e-business measures.
increasing the VAT threshold in line with inflation, keeping the UK threshold at the highest level in Europe. This will ensure that another 8,000 businesses will be entitled to operate without the need to charge VAT.
consultation on rationalising the frequency of VAT payments due from traders under the annual accounting regime and introducing a lower SME turnover limit of £100,000, under which these SMEs will be able to:
- use a "flat rate scheme". Within this scheme, SMEs will be able to calculate their VAT liabilities as a percentage of their turnover and avoid having to internally account for VAT on all of their purchases and sales. The scheme would be designed to generate broadly the same amount of VAT payable, but would be simpler to use.
- enter the annual accounting regime immediately rather than having to wait until they have completed a year of VATable trading.

NOTES FOR EDITORS

1. Customs and Excise published the results of a consultation exercise into the impact of VAT registration on small and medium sized businesses on 9 March 1999. No immediate solutions to ease the impact were proposed. Since then, however, Customs have held discussions and workshops with a wide range of academics, tax advisers and small business representatives, including the Confederation of British Industry, the Federation of Small Businesses and Manchester Business School to try to find acceptable solutions. The package announced above is the result of this exercise.

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