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VAT Registration Reduction

Last week, VAT specialists VATCalc revealed that the number of UK businesses registering for VAT dropped by over 40,000, the first drop in registrations since 2011. This was surprising, as most experts in the field expected the number to rise, especially as the VAT turnover threshold for registration has been frozen at £85,000 since 1st April 2017.

Despite the sudden drop in registrations, the number of VAT registered businesses in the UK has sat at around 2.5m for a while now, so what are the reasons for the sudden drop in numbers?

VAT Registration Reduction: Who is this happening to?

The most likely section of the business community to de-register are small businesses, especially sole traders and partnerships. The sharp drop in this sector is believed to be caused by increasing cost-of-living pressures as well as post-Covid 19 crisis insolvencies.

Looking through the information provided by the Office for National Statistics, the industries that saw the biggest decreases in registrations were the transport and storage sectors, hospitality, IT specialists and the sciences.

VAT Registration Reduction: Are there other reasons for the drop?

Yes, and it appears that HMRC are the primary reason. Many VAT experts have connected the decrease to HMRC’s recent crackdown on fraudulent claims.  Over the last 18 months or so, HMRC have beefed up its fraud-hunting team, with several ‘higher technical surveillance officers’ being appointed, as reported on their website.

So, it would appear that the Treasury has finally got the message that the only way to combat fraud, the bulk of which is online, is to have sufficient numbers of staff who have a high level of computer and internet knowledge. It has been clear for some time that most of the criminals targeting this previously poorly policed part of the tax system, already had the knowledge!

VAT Registration Reduction: Could the drop be down to a deliberate policy to reduce the numbers?

Most accountants are convinced that the bulk of the significant drop in VAT registrations can be directly linked to an unwieldy HMRC slowing down the process and only partially explained by HMRC’s more aggressive approach to hunting down fraudsters.

It is a fact that despite starting over 10 years ago, HMRC have still not integrated all legacy computer systems onto their main software platform. It will also not surprise you to hear that VAT registration, is just one of those legacy systems.

What is undeniably true is that the speed at which HMRC is issuing VAT numbers has been very slow in recent years, especially post-Covid. There is a lengthy backlog of VAT registrations that have not yet been processed, which wouldn’t have been included in the statistics.

Anecdotally my fellow accountants, almost without exception, complain that obtaining a VAT registration number for a client has been a nightmare for a year or more, with a new registration typically taking up to six months. That being said, I personally don’t believe it is a deliberate policy, but rather a toxic mix of inefficient computer systems, lack of competent staff and greater fraud-prevention scrutiny.

VAT Registration Reduction: Have the UK’s economic woes played a part?

As a result of 18 months of rampant inflation, increasing interest rates and a number of other negative factors, the economic situation is a long way from being perfect. Despite this however, the SME sector has remained relatively stable, with that said, there is clearly something else going on behind those statistics, but what is the question,

Finally, amidst all this doom and gloom, there has been a glimmer of optimism with significant increases in registrations in the arts and entertainment sector and also in the property sector.

Tax Accountant’s view

My best guess as to why there has been a significant drop in the numbers of VAT registrations, is that the climate for starting a new business or expanding an existing one, is poor because of the current economic woes of the UK economy. If you have a better idea however, answers on a postcard please!