Did you know that Value Added Tax (VAT) is the third-largest contributor to public sector finances, following closely behind income tax and National Insurance contributions? Making up a significant 15% of government revenues.
For over 15 years, the NHBF has been at the forefront of advocating for VAT reform and fairer policies. In our latest initiative, the NHBF has commissioned an independent paper by Pragmatix Advisory which models a 'smoothing mechanism' or tiered rates around the VAT threshold, aiming to incentivise growth. Currently, numerous businesses restrain themselves just below the threshold, and we are excited to share a one-page summary of the report with you.
The United Kingdom boasts one of the highest VAT thresholds in Europe, currently set at £85,000 at a 20% rate. Unfortunately, this creates a cliff-edge effect that stifles growth, encourages non-reporting, and ultimately reduces tax revenues to HM Treasury.
KEY FINDINGS FROM THE REPORT:
The report identifies two sets of options for a smoothing mechanism to change the current VAT system to encourage growth, namely:
- Options where graduated VAT could start at £85,000 but would mean reduced VAT revenue for the government.
- Options starting below the current threshold where VAT would increase in steps towards the current rate of 20% and the government would see no loss in VAT revenue.
The report also draws inspiration from successful cases in other European countries, such as Finland and the Netherlands, lower VAT rates have shown positive impacts. For instance, the Netherlands lowered VAT to 6% in the 2000s for labour-intensive services, resulting in the creation of 4000 sector jobs.
What do businesses in the hair & beauty sector think? Views are mixed.
- 86% of hair and beauty businesses support a graduated approach.
- 50% believe that a reduction in VAT would be most beneficial for their business.
- 25% suggest that raising the VAT registration threshold would help their business.
- 7% feel that lowering the threshold would be advantageous for their business.
- 17% of sector businesses are currently enrolled in the VAT flat rate scheme.
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