Education Station

Welcome to our regular feature with the NHBF. Visit the Education Station each month to gain unrivalled knowledge on the latest trends and discussions to elevate your business. This month, we learn about the NHBF Campaigning for VAT reform.

Incentivising Growth

In the complex web of public finances, 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. 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. For over 15 years, the NHBF has been a vocal advocate for VAT reform and fairer policies. Their latest initiative commissioned an independent paper by Pragmatix Advisory, introducing a ‘smoothing mechanism’ around the VAT threshold. The objective is clear: incentivise growth by addressing the limitations that cause businesses to operate just below the threshold.

Key Findings 

The report presents two sets of options for a smoothing mechanism, aiming to encourage growth while considering the financial implications. 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, resulting in the creation of 4000 sector jobs.

Stakeholders Mixed view

The hair and beauty sector is a crucial contributor to the UK economy, with 48,000 businesses across the UK making a £4.6 billion annual contribution to the UK economy, with consumer spending across the 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.

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.

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 businesses are intentionally staying below the £85,000 VAT turnover cliff edge, avoiding the associated costs and inconveniences.

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