In the complex web of public finances, Value Added Tax (VAT) stands as the third-largest contributor, making up 15% of government revenues. While income tax and National Insurance contributions take the lead, VAT plays a vital role in funding essential public services like schools, hospitals, and roads. However, a pressing issue has come to the forefront – the VAT threshold, currently set at £85,000, poses a cliff-edge effect, hindering growth and reducing tax revenues to HM Treasury.
NHBF's Advocacy for Change
The NHBF knows that VAT is hampering your business. That’s why for over 15 years, the NHBF has been a vocal advocate for VAT reform and fairer policies. Their latest initiative involves commissioning an independent paper by Pragmatix Advisory, introducing a 'smoothing mechanism' or tiered rates around the VAT threshold. The objective is clear: incentivise growth by addressing the current limitations that cause businesses to operate just below the threshold.
Key Findings from the Report
The report presents two sets of options for a smoothing mechanism, aiming to encourage growth while considering the financial implications for the government. Graduated VAT starting at £85,000 could mean reduced VAT revenue while starting below the threshold with incremental increases toward 20% would maintain government revenue. Drawing inspiration from successful cases in European countries like Finland and the Netherlands, where lower VAT rates spurred growth, the report suggests potential avenues for change. For instance, the Netherlands lowered VAT to 6% in the 2000s for labour-intensive services, resulting in the creation of 4000 sector jobs.
Mixed view
The hair and beauty sector is a crucial contributor to the UK economy, with 48,000 businesses across the UK making a significant £4.6 billion annual contribution to the UK economy, with consumer spending across the whole sector totalling £24.5 billion in 2022. Its stakeholders hold diverse opinions on the proposed VAT reform. While a vast majority of 86% advocate for a graduated approach, half of the respondents believe that a reduction in the rate of VAT would be beneficial for their business. A smaller fraction of 25% suggests raising the VAT registration threshold, while only 7% recommend lowering it.
Support from Industry Leaders
Caroline Larissey, Chief Executive at the NHBF, highlights a critical issue – the “cliff-edge effect” incentivises businesses to stay below the threshold, limiting growth potential and reducing tax yields. The report, however, doesn't propose a specific recommendation but aims to initiate discussions within the sector, with the government and other industry organisations.
Rebecca Munro from Pragmatix Advisory underscores the need for “change based on careful analysis of official data”. Their research reveals that around 47,000 UK firms are intentionally staying below the £85,000 VAT turnover cliff edge, avoiding the associated costs and inconveniences.
Industry leaders express support for the proposed smoothing mechanism. Jonny Haseldine, Policy Manager at the British Chambers of Commerce, acknowledges the “need to minimise administrative burdens on businesses.” Andrew Goodacre, CEO of the British Independent Retailers Association, supports the proposed reforms, stating that “a review of VAT thresholds and smoothing mechanisms is long overdue.”
The Need for Change
The call for VAT reform echoes loudly in the sector. The NHBF's latest initiative opens the door to meaningful discussions, inviting stakeholders to explore options that foster growth while ensuring a fairer tax system. As the debate gains momentum, the potential for positive change in the VAT landscape appears promising with an evidence-based case, offering hope for the future.
To request the full report and watch a Q&A webinar with NHBF’s senior leadership team, click here.