A Chance to Come up with a VAT Solution

There is a danger that VAT thresholds may well be altered in the next Budget but, despite the advance warning, few businesses have bothered to tell Customs and Excise how such a fundamental change would affect them. The department put out its discussion document over a month ago and has an open mind on the subject, but so far hardly anybody has bothered to comment.

The political orthodoxyhas for years been that small businesses need all the help they can get, so keeping as many of them as possible out of the VAT net must be a good thing.

By not having to account for and pay VAT, the small business would have reduced costs and save enormousaccounting and administrative overheads. As a result, the thresholds have generally risen with the cost of living, and several times - by more than the rate of inflation. Even that was not as easy as it sounds because the European Union does not recognize a minimum threshold for inclusion in VAT at all and some countries charge every single business.

To have a threshold, therefore, needed European Commission agreement and then each time the threshold was raised faster than inflation a special derogation had to be negotiated with Brussels. The sense of virtue about protecting young companies began to be dented, however, when a stream of small businesses in the service sectors complained that the system was creating unfair competition for them. For instance, a freelance hairdresser doing the work in customers’ homes may well fall below the £50,000 annual turnover for paying the tax. A small salon with only slightly more business than that, however, would have to pay the full 17, 5 pc on all its receipts. Similarly, a small back-street cafe selling tea and sandwiches, may be just under the tax limit, while a slightly larger establishment up the road has to pay.

In both cases the taxpayers have little recoverable VAT on their input because one is selling services, and the other food which has no VAT. That makes a huge financial difference betweena business taking in £49,000 a year and one with a £51,000 turnover. This is in contrast to dealers in goods subject to VAT. A shop selling tools, for instance, can recover the VAT on the input and pays tax only on its customers' payments. The total difference between a business paying VAT and one that does not is therefore relatively small. As the number of service industry complaints increased, Customs decided to find out if this really was a general problem or just a few isolated cases. That is why the department asked to hear from small business - to see what the effects of the alternative policies are likely to be. It is also why any company which would be affected by lifting or lowering thresholds should explain the impact before the political decisions are taken. Customs has in theory five options:

• Introduce a different threshold level for services

• Reduce thresholds across the board

• Leave thresholds unchanged and let inflation gradually reduce it

• Continue to raise thresholds at the rate of inflation

• Raise thresholds faster than inflation

In practice, different thresholds for goods and services would be open to argument and manipulation and would probably be too complicated to administer. Reducing thresholds is unlikely to be politically acceptable. The Whitehall preference is for lifting the minimum level as a way of excluding small outfits from coverage. That not only helps small business but makes the tax simpler to administer and cheaper to collect. Unfortunately, since the last request for derogation, tax harmonization has moved onto the Brussels agenda, which means getting permission for new faster-than-inflation increases is going to be tricky to negotiate in future.

That leaves only two practical and likely options: leaving the limits at the present levels, which means their value would be gradually eroded as money loses its value; or ensuring thresholds rise in line with inflation. If there were an enormous outcry for or against any of the options, however, it is just possible the choices could be reconsidered. A clerk of an accountancy firm said: "The tone of the consultation document suggests Customs is willing not only to listen, but to act upon small business concerns. That opportunity should be seized”.

Details of the proposals and the arguments are available from Customs. Anyone wanting a copy should fax details of their address to 0151 703 8397.

                                                                                              The Daily Telegraph, 1998

Practicum 6.7

Translate the italicized word combinations in the text into Russian

Practicum 6.8

Practicum 6.9

III. Communication Practice

Role play

a tax collector has a strong suspicion that there is something wrong with a client’s tax return. He is to meet with the taxpayer, who submitted the return and receive the information he badly needs. He anticipates resistance and hostility, and is aware he might have to push for answers

Brainstorming

- You are an entrepreneur, who runs a small café with the turnover of £49, 000. You are very much concerned about the looming VAT changes after reading the C&E discussion paper. You need to opt for one of the alternatives, outlined in the paper and suggest arguments in its favour. Provide evidence to support your option.

- Respond to the discussion paper as an owner of a bigger business – a petrol station with a turnover of £60, 000.

- Brainstorm both responses as a team of civil servants of C&E department. Look into the pros and cons each proposal implies.

Text 6b

The text to follow deals in talking economics. Study the text and use it as a starting point for communication