VAT - Time for a review?

As I'm sure everyone reading this blog is aware, the threshold for registering for VAT is currently £81,000 and I have just been discussing this with a client in the Fish and Chip trade who's sales are rising and are fast approaching this figure.

The issue from my clients' point of view is that if he just edges over the threshold he will need to pay approximately £13,500 of his turnover to HMRC in VAT payments which in such a small business represents a very substantial part of his income.

If he were to allow his turnover to increase above the threshold and register for VAT then in order to get his net turnover back to the level he is currently achieving (and just for the purpose of this blog let's work on the absolute maximum which would be £80,999), he would need to increase his turnover to approximately £97,200 - That's in excess of a further £300 per week or to put it another way, he would have to work an extra day.

But that's only part of the story because whilst he remains under the threshold he is able to operate at a higher gross profit margin as he can charge the going rate for his product but does not have to pay the VAT, so when he factors that in, he would actually need to take an additional £450 per week and not the additional £300 he originally thought which means him increasing his opening times yet further.

Of course the problem is exacerbated as in order to achieve that extra turnover he will increase his energy and staff costs quite considerably.  Although I have not checked his calculations he estimates that to cover off all his additional costs he would need to increase his turnover by approximately £600 per week to simply put him back in the financial position he is in at present, or once again to put it in a different way, to increase his working week from 5 to 7 days.

What has my client decided to do?  He can't really see any sense in working all those extra hours just to be in the same position he is in now and given that he has decided to reduce his hours by taking an opening off and continuing to monitor the situation.  If his turnover increases again over time to put him close to the VAT threshold, then he intends to reduce his hours further.

So who benefits from this situation?  Well, certainly not my client, other than in having a little more time off; not any of my clients suppliers who will actually earn less from him than they have been doing until now and certainly less than they otherwise would have done if his turnover could have increased.  So what's the position for HMRC?  Well they will gain nothing in VAT payments from my client and will in fact take slightly less from my clients suppliers.

The conversation has set me and others here at Ernest Wilson thinking that it is time the government reviewed the current system of VAT registration which is not only keeping the smallest of businesses artificially small but also helping to reduce the overall VAT take.  Wouldn't a system where businesses registering for VAT only paid the VAT on the turnover in excess of the threshold be a much fairer and much more progressive system?