The Office of Tax Simplification (OTS) has revealed 8 core recommendations for the government to clarify the VAT system.

It called the current VAT threshold (£85,000 in 2017/18) as the most pressing issue in its Routes to Simplification report, which was labelled as “long overdue” by the Federation of Small Businesses (FSB).

The report claims the VAT threshold in the UK is the highest in the EU and £70,000 higher than the average VAT exemption around the world, which stands at £15,000.

While the UK threshold enables many small businesses to stay out of the VAT system, the OTS claimed recent increases could be costing the economy more than £2 billion a year.

Other recommendations from the OTS include:

• a review into the reduced rate, zero-rate and exemption schedules
• a review into the land and property threshold
• alternatives to remove the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.

Mike Cherry, chairman of the FSB, said:

“This fundamental review of our vastly complex VAT system is long overdue.

“A smoothing mechanism, which doesn’t force any more small firms into the VAT system, could encourage more businesses to grow beyond the £85,000 cliff edge.

“We welcome the report’s drive towards improving VAT guidance and reducing the massive admin burdens associated with the tax.”

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