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Small businesses could face VAT shock under EU withdrawal plans

The UK will lose its veto on proposed reductions to the threshold for exemption from the sales tax, a report has warned.

(Gareth Fuller/PA)
(Gareth Fuller/PA)

Campaigners have warned of a VAT shock for small businesses if Parliament approves Theresa May’s EU Withdrawal Agreement in a vote next month.

Proposed changes to EU rules would reduce the threshold for small business exemption from charging VAT from an annual taxable turnover of £85,000 to £76,700.

The People’s Vote campaign for a second EU referendum said the change would force hundreds of thousands of traders to slap VAT on their products and services for the first time.

A little-noticed parliamentary report, released on Christmas Eve, warned if the Withdrawal Agreement is ratified and the changes to EU directives go through, the UK would be forced to lower the threshold even if Brexit has happened.

The report, by the Commons EU Scrutiny Committee, said the UK will lose its veto over any change if it leaves the EU as planned on March 29.

But under the terms of the Withdrawal Agreement, Britain will be required to implement the directive at least until the end of the proposed transition period, which could last until December 2022.

The “backstop” arrangements in Mrs May’s deal could require Northern Ireland to remain aligned with EU VAT law “indefinitely”, meaning the new threshold could stay in place after the transition is over, the committee warned.

This would have “significant implications” for thousands of small businesses, many of which would have to charge VAT for the first time.

Under the EU’s current VAT directive, individual EU countries have the option of exempting smaller companies from charging the sales tax to customers.

In the UK, the small business exemption is applied to firms with an annual taxable turnover below the £85,000 maximum permitted by EU law. This threshold is currently frozen until 2022.

Under the changes tabled in Brussels in January 2018, the threshold would be reduced to 85,000 euros – currently around £76,700.

The report stated: “Having to transpose the directive could mean that the Government would be under a legal requirement to lower the VAT registration threshold for SMEs by nearly £10,000, as the UK limit is currently above the upper threshold of £76,700 proposed by the European Commission (and to which, so far, the remaining Member States have not objected).

“Any new EU legislation would, for the duration of the transition, override the UK’s discretion to legislate in breach of the directive.”

Nobody put ‘Pay More Tax’ on the side of their bus in the referendum campaign Chris Leslie, former shadow chancellor

The committee said its concerns would not apply if the UK leaves the EU without a withdrawal agreement, as Britain would then be “free to amend or repeal elements of its VAT law” from March 30 2019.

But it warned: “Without a Withdrawal Agreement, UK exports would face the immediate re-imposition of VAT controls on goods destined for the EU, as the latter has refused to copy the UK’s approach of deferring VAT controls at the border in a ‘no deal’ scenario.”

Labour’s former shadow chancellor Chris Leslie, a leading supporter of the People’s Vote campaign, said: “Nobody put ‘Pay More Tax’ on the side of their bus in the referendum campaign.

“This is another thing that none of us could possibly have known about back in 2016 and whatever way you voted then you weren’t voting for more taxes and bureaucracy on small business and the self-employed.

“The Prime Minister’s plan makes the UK a rule-taker and removes our say round the table.”

Mr Leslie added: “The real choice now is whether to go ahead with a Brexit deal or stick with the deal we already have as members of the EU.

“Now we know what Brexit looks like, the public should be given the opportunity to decide in a People’s Vote – is this the kind of deal we want, or is the deal we already have in the EU better? In the end, only the people can sort this out.”

National chairman of the Federation of Small Businesses Mike Cherry said: “VAT is the hardest, most time-consuming tax for small businesses to administer, typically taking more than a working week a year.

“Dragging more small firms into this bureaucratic regime would take hard-working entrepreneurs away from running and growing their businesses.

“FSB campaigned hard to stop a wholesale expansion of VAT domestically, persuading the Chancellor against such a move which he announced at the Spring Statement and reconfirmed at the Autumn Budget. Now is not the time for it to be brought in via a different route, so we will be using our influence in the EU and elsewhere to stop it.”

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