With fears that the VAT threshold could be lowered in this week's budget, the Federation of Small Businesses has warned that such a move would "drain small firms of time and money".
VAT-registered small businesses currently spend an average of 44 hours - the equivalent of six working days - managing VAT administration every year, according to the latest research by the Federation of Small Businesses (FSB).
Over a quarter of firms (27%) surveyed said they find VAT difficult to understand, compared to just 5% who said it is easy to grasp. Common issues are exemptions (53%), establishing the rate at which payment is required (24%) and different thresholds (21%).
Mike Cherry, FSB national chairman, said: "VAT is the most time-consuming tax to deal with. Once again small firms and the self-employed fear the chancellor could single them out for a tax grab at the Budget, this time by forcing more of them into the VAT regime. Doing so would create a real drag on business output. At a time of spiralling costs and persistent uncertainty, a lowering of the VAT threshold is the last thing our entrepreneurs need."
Cherry added: "The VAT regime is awash with complexity and anomalies. When the burden of administration falls so heavily on business owners and the self-employed, it opens the door to lost hours and honest mistakes. Small firms are not like corporations - they don't have accounting expertise on tap.
The FSB is calling on the Government to introduce a "smoothing element" around the threshold as suggested by the Office of Tax Simplification (OTS) in its recent review of VAT.
"We have an issue with some firms approaching £85,000 of turnover and putting the brakes on," said Cherry. "The registration cliff-edge remains a concern for many firms, but making huge swathes of businesses and the self-employed join the hugely complex VAT regime is not the answer. The chancellor should be prioritising simplification, rather than expansion, of VAT and the tax system at large."
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