Stealth tax will force 60,000 more small businesses to charge VAT

Jeremy Hunt - Aaron Chown/PA
Jeremy Hunt - Aaron Chown/PA

Jeremy Hunt’s stealth tax will force 60,000 more small businesses to charge VAT, the Treasury has admitted.

The Chancellor of the Exchequer’s decision to freeze the level at which businesses are required to add the tax to the goods and services they sell will see the Treasury raise £680 million.

The measure, which came in the Autumn Statement, unusually did not include a report of how many businesses it would affect.

But in a written parliamentary answer this week, Victoria Atkins admitted internal Treasury analysis shows around 60,000 more small businesses and sole traders would charge the tax compared to the current number.

At present, businesses that have a turnover of less than £85,000 are not required to charge VAT on their goods and services, in a policy designed to reduce prices for customers that shop with smaller outlets.

It also means the traders do not have to file a VAT return to HMRC and pass the tax revenue on to the Government.

Current limit to remain until 2026

Mr Hunt’s decision to freeze the threshold amounts to a “stealth tax” that will see more businesses dragged above the limit as inflation increases their turnover.

The threshold had already been frozen at the current level by Rishi Sunak in March 2021, when he was chancellor.

That decision will keep the current turnover threshold until 2024, raising £180 million in extra tax.

But Mr Hunt’s statement said the £85,000 limit would remain for a further two years until April 2026, raising a further £680 million in taxes as prices rise.

The total number of businesses forced to pay VAT as a result of both freezes is almost 80,000.

The threshold was last raised from £83,000 to £85,000 in April 2017, when ministers published a note explaining how many businesses would be affected.

In response to a written parliamentary question by Labour’s Emily Thornberry, Ms Atkins said: “The UK has a higher VAT registration threshold than any EU Member State and the second highest in the OECD at £85,000.

“This keeps the majority of businesses out of VAT altogether. At Autumn Statement it was announced that the threshold would remain at £85,000 for two further years until 31 March 2026.

“It is estimated this will bring around 60,000 businesses into VAT.”

The news comes ahead of the second reading of the Government’s Finance Bill, which provides the legislation required for tax rises in the Autumn Statement, on Monday.

Middle-income earners to be hardest hit

Liberal Democrat MPs are planning to introduce an amendment that would require HMRC to write to anyone affected by the freezing of income tax thresholds, explaining how much more they will be required to pay.

The party has accused the Conservatives of “betraying middle England” because the changes will mean around six million people are dragged into a higher income tax bracket as wages rise.

Sarah Olney, the party’s Treasury spokeswoman, said: “Instead of sneaking these tax rises in through the back door, the Government should write to every family in the country to spell out exactly how much this stealth tax raid will cost them.

The statement froze the point at which workers begin paying the basic rate of tax at £12,571, while the threshold for the higher 40p rate of tax will remain at £50,271.

Paul Johnson, the director of the Institute for Fiscal Studies, has said those on middle incomes will be hit the hardest by the tax changes in the coming years.

“They won’t benefit from the targeted support to those on means-tested benefits,” he said.

“Their wages are falling and their taxes are rising. Middle England is set for a shock.”

The Lib Dem amendment is not expected to pass because it would require the support of Conservative MPs to become law.