Jeremy Hunt plots to hit small businesses with stealth VAT raid

Jeremy Hunt is plotting a stealth tax raid on small businesses that will force thousands more to pay VAT as he scrambles to balance the country’s books.

The Chancellor is preparing to hold the threshold at which businesses must register to pay VAT at £85,000 of turnover until 2026, instead of raising it in line with inflation.

The plans mean that thousands more businesses will pay the tax for the first time as their turnover increases in line with rising prices.

That threshold has already been frozen until 2024, but Mr Hunt and Rishi Sunak, the Prime Minister, are considering extending this by another two years.

Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said: “Freezing the threshold will land badly with businesses and drag more small firms into paying it as their costs and prices rise.

“Our research shows close to a quarter of small firms see the VAT threshold as a barrier to growth. Keeping it frozen would be a genuinely anti-growth measure for a large section of the economy, disincentivising those who’re now below the threshold to be active.

“If the Chancellor, a former entrepreneur himself, is serious about encouraging suppressed economic activity, he should instead raise the VAT threshold to £100,000, and deliver the Treasury’s promise to look at phasing the threshold so that it doesn’t cause such a cliff-edge. Simply freezing it would be a rather short-sighted move.”

Mr Hunt and Mr Sunak are still putting the finishing touches to the Autumn Statement, which will be delivered next Thursday.

They have warned they have to fill a fiscal black hole of up to £60bn, of which around £35bn will come from spending cuts and £25bn from tax rises.

For example, the rates at which people start paying the different levels of income tax and national insurance are set to be frozen from 2024 - raising £5bn a year.

Other taxes, such as inheritance tax, could also be affected by a similar freezing in the threshold.

Liz Truss indicated during the Tory leadership campaign that she would like to increase the amount above which businesses have to register for VAT.

However, the measure did not appear in Kwasi Kwarteng’s mini-Budget.

Duncan Simpson, chief economist at the TaxPayers' Alliance, said: “Freezing thresholds at a time of high inflation is tantamount to tax hikes.

"VAT places a great administrative burden on businesses, not least on the small firms who now face the prospect of exceeding the threshold and being dragged into a new tax.

"Ministers must avoid crippling micro-businesses with these stealth tax rises."

Earlier this month it emerged that Mr Sunak is drawing up plans for years of tax rises for everyone in the country, as a Treasury source warned: “It’s going to be rough”.

The Prime Minister and the Chancellor agreed that “tough decisions” would be needed on tax rises, given the “eye-watering size” of the fiscal black hole left by the mini-Budget.

The Treasury said that while those with the broadest shoulders should bear the greatest burden, given the scale of the challenge it is “inevitable” that everybody would need to contribute more in tax in the years ahead.

The source said: “It is going to be rough.

“The truth is that everybody will need to contribute more in tax if we are to maintain public services.

“After borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone.”