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Mr Peter Bedford (Mid Leicestershire) (Con)
I beg to move,
That this House has considered the impact of the VAT registration threshold on SMEs.
It is a pleasure to serve under your chairmanship, Mr Vickers. It was Napoleon Bonaparte who once said that “England is a nation of shopkeepers”. As is often the case with Napoleon, he was wrong. England, and indeed the UK, is a nation of entrepreneurs. Across the UK, early risers and late-night grafters—the men and women who channel their entrepreneurial spirits into businesses and serving their communities—form the backbone of our economy. However, we in this place sometimes let them down. That is certainly the case with the current nonsensical VAT registration threshold.
Right now, businesses in the UK have to be VAT registered when their turnover reaches just £90,000—an arbitrary figure. Once a small business has crossed that cliff edge, it is hit with added regulatory compliance costs and the need to charge their customers 20% more for their services. I do not want to pre-empt the Minister’s response, but I am well aware of the fact that the UK has one of the highest thresholds in Europe—that is not the point. I am arguing for the boldness to unleash the Great British entrepreneurial spirit once again.
Increasing the threshold to £90,000 was a positive move by the previous Conservative Government. I recognise the complexities surrounding the Windsor framework, but when we voted to leave the European Union in 2016, we wanted to take back control of our money, our borders and our laws. We should look at this again, and seek to also include Northern Ireland businesses with an increased VAT registration threshold.
As a chartered accountant by profession, I have seen first hand the implications that the UK’s tax regime can have for businesses. I enjoy conversations about the economy and business growth, and one recent example from my constituency surgery stands out. I met with Chris and Annie Ensell, talented entrepreneurs running a thriving wedding photography business called Bloom Weddings. Joined by their daughter, they told me of their success and their frustration. They had both become increasingly concerned about approaching and potentially surpassing the VAT registration threshold cliff edge.
They now face the agonising decision between limiting the number of weddings they agree to service or passing on increased costs to their customers, which would limit their competitiveness. I ask the Minister—who is part of a Government that say they are going for growth—is that fair? How will this encourage more people like Chris and Annie to build up their businesses?
In the Government’s manifesto, they claimed they understand that small firms, entrepreneurs and the self-employed face unique challenges, but we have seen them eat into small to medium-sized enterprise profit margins by increasing national insurance contributions and the national minimum wage. We have also seen them add more regulatory burdens with the Employment Rights Bill, which is set to add £5 billion to the costs of UK businesses. However, today is an opportunity to for the Minister to show real support for small businesses, such as those in my Mid Leicestershire constituency, by committing to review the VAT registration threshold.
I regret to say that I am not overly optimistic. When the previous Government rightly increased the threshold, Sir Edward Troup, a Labour tax adviser, ridiculed the idea, claiming that halving the threshold would somehow encourage growth. Perhaps even more shockingly, the current Under-Secretary of State for Work and Pensions, the hon. Member for Swansea West (Torsten Bell), has proposed slashing the threshold to a derisory £30,000.
Robbie Moore (Keighley and Ilkley) (Con)
Does my hon. Friend agree that this demonstrates that the Labour Government do not understand how our small businesses operate, and are not on their side? We see the impact of not only VAT registration, but employer’s national insurance, minimum wage and business rates increases, among other things. Does he agree that this Government do not understand how small businesses want to grow, operate and thrive?
Mr Bedford
I absolutely agree. Over the last year, particularly in the Budget and recent announcements, we have seen measures that stifle the growth of SMEs and small businesses. I thank my hon. Friend for raising that today because I am passionate about supporting them, not only so that the economy can grow, but so that we can create jobs and opportunities for all. I will always support small family businesses, and I will never support proposals to slash the VAT threshold to such low levels.
What is even more frustrating is the fact that the voice of industry has not been heard; its calls have fallen on deaf ears. The Federation of Small Businesses has previously highlighted that the extra bureaucracy of being VAT-registered adds £4,100 on average to the running costs of a business. UKHospitality also notes that there have been missed opportunities to be bolder and to alleviate regulatory burdens on the hospitality sector.
Mr Gregory Campbell (East Londonderry) (DUP)
I do not know if the hon. Member is aware, but just this morning the Federation of Small Businesses in Northern Ireland released a report about the complications that the Windsor framework is creating for small businesses in Northern Ireland. Does he agree that SMEs are the backbone of the UK economy in all regions and that we need to try to do whatever we can to reduce bureaucracy rather than increase it, which is what the Windsor framework has achieved?
Mr Bedford
I thank the hon. Member for his intervention and I absolutely agree. As a Unionist myself, I want to see all parts of the UK thrive and grow, and that obviously includes Northern Ireland. This debate equally applies to Northern Ireland as it does to everywhere else in the Union.
I was talking about UKHospitality, which says it would like to see the VAT rate cut to 12.5% for the industry. I think that proposal has merits and I encourage the Minister to consider it.
Finally, I recently met the Institute of Chartered Accountants in England and Wales and it was clear that confidence among small businesses is in decline. The ICAEW would like to see the whole VAT system simplified and the registration threshold reviewed. That would reduce compliance costs, but it would also enable small businesses to grow beyond the restrictive cliff edge that is currently in place.
The Minister may not be a fan of Margaret Thatcher, our first female Prime Minister, but she believed that if people work hard, they should have the opportunity to succeed, and that the Government’s role is to create the conditions for that success. That was why she launched the enterprise allowance scheme, which helped to create now-famous brands such as Superdry and Creation Records.
However, if the Minister wants a more contemporary example of a state supporting businesses to grow, he should look at our good friends in Singapore. First, as is well-documented, corporation tax in Singapore is low, but in addition small businesses in Singapore have the pioneer certificate incentive, which encourages start-ups in undersubscribed industries. I am not asking the Minister for such a scheme here—I know that that would perhaps be too bold—but what I am asking for is a modest and sensible change that would make a real difference to entrepreneurs across the country. Raise the VAT registration threshold; push it beyond £90,000. Do it for the small businesses that want to grow, to diversify and to serve their communities, but also do it for the economy and for consumers, who will benefit from lower prices and greater choice. Above all, do it for the spirit of enterprise that has always defined the United Kingdom.
Martin Vickers (in the Chair)
I remind Members that they should bob if they wish to be called during the debate.
Susan Murray (Mid Dunbartonshire) (LD)
It is a pleasure to serve under your chairmanship, Mr Vickers, and I thank the hon. Member for Mid Leicestershire (Mr Bedford) for securing this important debate.
Small and medium-sized enterprises are not just crucial to our economy; they are its lifeblood, driving innovation, employment and local growth. In my constituency of Mid Dunbartonshire, we have many SMEs that contribute enormously to the local economy, including hair and beauty salons, and they also keep our high streets alive. Beyond this, though, our local businesses shape our communities, fostering a sense of identity and community pride, which we simply do not see when international conglomerates set up shop.
However, as has already been mentioned, in the current business environment, with the increase in employer’s national insurance contributions, the huge increase in utilities costs, and inflation driving up the cost of materials, the current VAT threshold poses a substantial barrier, actively stifling the potential of SMEs and limiting their growth.
The VAT threshold, currently set at £90,000, creates a growth cliff edge for SMEs. Many businesses deliberately limit their turnover to avoid crossing this threshold and facing the administrative burden, increased costs and competitive disadvantages that follow. That ceiling hampers ambition and penalises success—the exact opposite of what our tax system should encourage.
The leap to becoming VAT registered means businesses face not only significant new compliance costs, but the challenge of remaining price competitive. Non-VAT-registered competitors can undercut prices, placing growing businesses at a distinct disadvantage, and their larger competitors can use their size to offset the additional burden of VAT. Essentially our small, growing businesses are competing with those at the top and those at the bottom, both of which the system is designed to help. Moreover, the sudden administrative burden—VAT accounting, quarterly reporting and more complex financial management—is daunting and resource intensive.
Such complexity distracts entrepreneurs from their primary goal: growing their business, creating jobs and contributing positively to their local economy. The current VAT threshold discourages growth, distorts competition and creates unnecessary administrative challenges for SMEs. It is clearly time for change. Through a smoother transitional system or targeted administrative support, we must ensure our tax system empowers small businesses to grow confidently, and does not hold them back at critical stages of their development.
Lewis Cocking (Broxbourne) (Con)
It is a pleasure to serve under your chairmanship, Mr Vickers. I congratulate my hon. Friend the Member for Mid Leicestershire (Mr Bedford) on securing this important debate. He is a passionate defender of small and medium-sized businesses in his constituency and across the country.
I meet small business owners in my constituency of Broxbourne almost every week, and every single one, from Carmela’s hairdressers in Cheshunt to the Smokeshed restaurant in Hoddesdon, has made it clear to me just how damaging Labour Government policies are towards small businesses. This Labour Government have put up the cost of growing a small business significantly, with the hike in employer’s national insurance making it more expensive for businesses to bring on and employ new people. Increasing the burden of regulation is also deterring employers from taking risks with who they employ. Both of those disastrous policies are leading to fewer people in work, taxes at the highest level on record and growth down. As I have said in this Chamber before, the drastic reduction in business rates relief is crippling for our retail, hospitality and leisure businesses, which are the anchor of so many of our town centres up and down our beautiful United Kingdom.
As we have heard this morning, what is also holding SMEs back is the current rules around VAT registration. When I go out and speak to businesses across my constituency of Broxbourne, whether I speak to them in business forums, through Love Hoddesdon, Love Cheshunt, Love Waltham Cross or the Stanstead Abbotts small business network group, they are all united in one thing and one single policy that they reckon is really holding them back: the VAT threshold. They all moan to me about it. They all say they need an easier solution. I have so many examples of businesses that I speak to that have said, “Lewis, it is not worth upscaling our business. It is not worth trying to do better, not worth taking on more business, not worth employing more people. It is not worth doing those things because, when we go just over the threshold, it takes our competitive edge away when we are trying to compete with people that are just below that threshold.” They have all come forward with a simple solution, which is that there should be a taper mechanism to build up to the 20%, rather than the cliff edge that we have now.
The situation is absolute nonsense. I have successful business owners in my constituency that go in day in, day out. As I have said in this Chamber before, I was told at the Dispatch box by a Government Minister that it is the Government that create economic growth. Well, it is not. They do not understand how business works in this country. Their whole philosophy around who creates economic growth is wrong. It is the millions of small business owners up and down the United Kingdom and all of the entrepreneurs that invest in their ideas that create economic growth. As I said, it cannot be right that I have examples in my constituency of people turning down work, not taking on more employees, and not creating the economic growth that we all want to see for this country because of measures like the VAT threshold.
We heard before the general election that this Government were going to be the most pro-business we had ever seen, but they have not come up with a single policy that has helped my business owners in Broxbourne. They all think that all this Government’s policies around businesses, including changing the threshold for business rates and not looking into the issue of VAT registration, are affecting how they do business across the country. That simply cannot be right—it is nonsense. We all want more jobs created and we all want our high streets to thrive.
Lots of business owners have lots of issues with what is going on in the economy right now, but this one single thing unites them. When I speak to them, they all raise this issue with me. They all want the Government to take it seriously and think up a solution. The Minister could go and speak to his officials at the Treasury and there could be a simple solution to this problem. That would create economic growth overnight. Businesses up and down the country would probably take on more employees and more business if this problem was solved. It is affecting lots of the people that I speak to in my constituency of Broxbourne.
Why on earth would someone come out of the education system, invest in their idea, take risks and set up a business in the United Kingdom right now? It is so heavily burdened with regulation. We need to unlock the aspiration of the next generation, and we can do that by solving simple things that business owners come to speak to us about. We need to make sure that the VAT threshold is no longer a cliff edge and bring in a taper mechanism.
I look forward to hearing what the Minister says in reply to this debate. I am hopeful that he will think long and hard about what he can do about this issue, because he has the tools at his disposal to solve it. I suspect that there will be lots of consensus among those of us speaking in this debate on the issue and on what we think the solution will be. I hope that the Minister is listening and will take note of all our comments when he winds up.
Robbie Moore (Keighley and Ilkley) (Con)
It is a pleasure to serve under your chairmanship, Mr Vickers. I thank my hon. Friend the Member for Mid Leicestershire (Mr Bedford) for securing today’s important debate because, as he and my hon. Friend the Member for Broxbourne (Lewis Cocking) have illustrated, many of our small independent businesses have contacted us as their representatives about the challenge around the VAT threshold time and again.
The VAT threshold builds on the collective impact of all the budgetary changes that have been having a hugely detrimental—indeed, catastrophic—impact on our many family businesses. The increases in employers’ national insurance, minimum wage, business rates—crikey, the list goes on. That is before we start looking at other legislation that is coming down the line, such as the Employment Rights Bill, which is creating more uncertainty for employees, dare I say, because employers quite rightly will not want to take the risk of growing and expanding, with further regulation and legislation coming down the line.
Small businesses are the lifeblood of any prosperous community, and my constituency of Keighley and Ilkley is no exception. Keighley is home to many fantastic small high street businesses, as well as a number of nationally and internationally acclaimed manufacturers. Likewise, Ilkley boasts a fabulously good high street, which helped the town to be officially named the best place to live in the whole north of England, as rated by The Sunday Times. I am sorry to say that our many small businesses are under immensely increasing regulatory and tax pressures as we go forward. Whether because of the rise in budgetary pressures introduced by the Budget last year or VAT, the subject of this debate, those businesses are struggling right now to make ends meet, and the challenge continues.
The mighty British fish and chip shop is one sector that is particularly struggling, with rising input prices and uncertainty over supply chains. I am honoured to represent many fish and chip shops across Keighley and Ilkley, and was lucky enough meet a great constituent of mine, Dwaine Smith, and go along to Old Time Fisheries at the top of Devonshire Street in Keighley to sample the fine offering. He was keen to get across to me the absolute pressure that the fish and chip industry is facing as a result of the increased cost of fish and chips coming into the sector, as well as the increased pressures around employer’s national insurance, the minimum wage and the challenge around VAT thresholds. On a number of occasions I have spoken to the operator of Kirkgate Fisheries, in Silsden in my constituency, and he has raised the issue of VAT with me as the No. 1 challenge that he is facing. Bearing out what my hon. Friend the Member for Mid Leicestershire said, as an organisation it has actively looked at reducing the number of hours that it is open because of the challenges associated with VAT registration and the threshold that has been put in place.
We cannot be in a scenario where businesses are coming to us time and again, whether in the fish and chip industry or other sectors such as the wedding industry, as was referenced by my hon. Friend—it applies to every business—because they are being effectively constrained from growing and expanding because of the VAT registration challenges and the burden of the VAT threshold. It is sad to see popular, successful businesses in our communities having to commit acts of self-harm, not because they want to but because they have no other option available—they are forced to because of the increased taxes being put on their shoulders.
That brings me to the nub of the issue: this debate is about not just the level of the VAT threshold—although I am pleased to say that it rose steadily under the last Conservative Administration—but the hugely negative impact that the cost of VAT registration is having on the growth of many businesses in my constituency. It is not viable to sit just under the threshold, as has often been communicated to me by many of my constituents, and without further investment to get above it, businesses stagnate. That is the problem that we are actively seeing. I hope that the Minister will reference this cliff edge, which many of our hard-working businesses are facing, and that he will address how the Government plan to see the transition for businesses between VAT regimes.
I want to see businesses across Keighley, Ilkley, Silsden and the Worth valley thrive; I want to see families set up businesses that they have control of, that are pillars of the community and drive the local economy. Without doubt, they are the fabric of our communities. To do that, we must create a tax system that encourages expansion and growth. At the moment, the VAT threshold is a great filter to success. It is stagnating many of our businesses and constraining them from being able to grow at the speed they wish. At worst, many of our businesses are reducing their hours of operation and the amount of products that they are selling, because of the VAT threshold and the cost of VAT registration. This simply cannot continue. It is within the power of the Government to make that change, and I hope that the Minister is listening.
Finally, I would like to understand from the Minister whether any financial impact assessment has been made by this Government, not only on VAT but on the collective impact of those additional regulatory and financial burdens that have been put on hard-working businesses in our constituencies. I go door-knocking every week, speaking to residents and large and small businesses across my constituency. On the doorstep I openly ask people, 20% or 25% of the way into this Parliament—a year into this Government—to give me one thing that they feel the Government have delivered that has had a positive impact on their business. They cannot name one thing.
Jim Shannon (Strangford) (DUP)
It is a real pleasure to serve under your chairship, Mr Vickers. I thank the hon. Member for Mid Leicestershire (Mr Bedford) for setting the scene and giving us all an opportunity to engage with the Minister on this issue, as the hon. Member for Keighley and Ilkley (Robbie Moore) just did. The Minister is always a very pleasant gentleman—we all know that—and he always seems to be incredibly calm. I am not sure how he does it; maybe all the worries are somebody else’s worries—I do not know what they are. But I do wish him well with his answers to the questions that we pose today.
I read a very interesting article that outlined the pros and cons of raising the VAT threshold above the £90,000 that we are sitting at. What was most notable was the fact that these arguments were all made around an unalterable fact: we in Northern Ireland are hampered from truly having a full discussion by the Windsor framework, which does not allow Northern Ireland VAT to rise above the £90,000 threshold. Even if this debate today could make a change, and even if the Minister agreed with the change, it could not happen. Why? Because of the Windsor framework. I look to my right-hand side: maybe one of the Conservative Members there might have been in the previous Government who left us in Northern Ireland in that limbo land. They can answer for themselves—it is not for me to answer for them—but I do make the point that we were let down badly by the Conservatives in relation to this.
The reality is that, unless we can have regional VAT rates, the UK is prevented from acting in our best interests economically by the EU. It is a fact of life for us, unfortunately, nine years after the vote. I voted—and my hon. Friend the Member for East Londonderry (Mr Campbell) beside me voted—to leave under the same terms as the rest of the United Kingdom; but the EU is still dictating our economic policy in Northern Ireland. That is the reason that the DUP has consistently stood against this European interference. Perhaps, now that some businesses in other Members’ constituencies are being affected, in different regions—
Mike Martin (Tunbridge Wells) (LD)
I thank the hon. Gentleman for giving way, but does he not now regret his vote to leave, seeing as it created all of these problems for his constituents?
Jim Shannon
No. I thank the hon. Member—he is a friend—but look, honestly, I am a Brexiteer; it is no secret. I want the same Brexit as the rest of the United Kingdom got. I did not get that. We were let down by a Government who did us over, so we did not get what we wanted, but if I had got the same as everybody else in England, Scotland and Wales—and my hon. Friend had—then I would not be having this conversation, and I would not be doing this spiel. I am still a Brexiteer and always will be a Brexiteer, and incidentally, the majority of people in my constituency voted to have the same Brexit as the rest of the United Kingdom, and my constituents did not get it either. When the Minister thinks about today’s debate, if he does not mind me saying, I would ask that he would petition the Cabinet, if it is not too much to ask for, to withdraw from this inherently flawed agreement for us in Northern Ireland.
The article that I read discussed the benefit of raising the threshold, highlighting that Government should want to encourage small businesses to grow. It would be much more effective to raise the threshold to £250,000, I would have thought. It is probably a better figure to work with. That is, of course, supported by the Government’s own statistics, which showed that, in 2022-23, £117 billion —75% of the total net VAT collected in the UK—was paid by traders with an annual turnover of more than £10 million. So, what does that mean exactly? Raising the threshold to £250,000 may not, therefore, have a significant impact on VAT’s total receipts, but it would allow His Majesty’s Revenue and Customs to save costs and to focus its time on ensuring that the largest VAT payers paid the right amount of tax.
The Government have a big, difficult task before them; they have got to balance the books—whatever the figure might be for the black hole, or whatever it may have been. They have set themselves that target to balance those books, and I understand that. Maybe there is another way of saving money, perhaps within HMRC, that could be better. The Minister is a very wise man; he will understand the point I am making, and the civil servants, who are the brains of the Department—I hope the Minister does not mind me saying that—will be able to respond, and maybe pass the message on about whether that can be done.
Raising the threshold would allow a large number of traders in my area, and others, to focus on growth and not question whether they could grow a business enough to cover the additional accountancy costs when VAT is involved. When most businesses register for VAT, they are faced with a choice: either increase their prices by up to 20% or lose 20% of their existing prices as VAT. That is a difficult scenario for a business. The former makes the business less competitive and likely to see a drop in sales, and the latter eats into the profits and ultimately reduces the amount of money the business can use to expand. Neither option advocates for small business growth. As I have said, this is a moot point, as the EU will not allow us in Northern Ireland even to consider raising the threshold. I cannot tell businesses in Strangford or across Northern Ireland that it could be an option.
Some argue that there are benefits to retaining the VAT thresholds. Research undertaken for HMRC in 2016 found that 20% of unregistered businesses that were trading close to the VAT threshold had taken action to remain below it. Of those businesses, almost half said they had closed their businesses for part of the year to avoid having to register for VAT. One in five said they had turned down work, which was an indication that they could not grow as they wanted to because of the restriction. That strongly suggests that a significant number of businesses actively manage their turnover in order to stay below the VAT registration threshold. Lowering the threshold would prevent businesses from suppressing their trade in that way, which would in turn encourage economic growth.
Mr Gregory Campbell
Does my hon. Friend agree that in recent years, because of inflation, even small businesses in the retail trade that try to maintain a level just below the threshold find that they must pass on rising prices to the consumer? That means they will inevitably come to or above the threshold, and even an attempt to keep below it will often fail.
Jim Shannon
My hon. Friend always intervenes with words of wisdom and understanding. Perhaps the Minister will respond to that.
There is little point in Northern Ireland MPs discussing this issue, unless the discussion involves the revocation of the Northern Ireland protocol and each aspect of European interference. I ask the Minister sincerely, respectfully and honestly to take back to the Cabinet the circumstances of the Windsor framework, to ensure that Northern Ireland traders can have the very same options as those in England, Scotland and Wales.
Mr Angus MacDonald (Inverness, Skye and West Ross-shire) (LD)
Thank you for allowing me to speak, Mr Vickers, after I turned up late.
Few people can speak about VAT with such excitement as I can. I was UK entrepreneur of the year, I have lectured on entrepreneurship for 20 years, and I have mentored many early-stage businesses. I have concluded that the one thing we can do that could transform the small business community is to increase the VAT registration threshold to allow microbusinesses to scale up.
Has anyone tried to get hold of a tradesman recently—a plumber, a decorator or an electrician? I will use the collective word plumber, to make it easier for people of my mentality to understand. There is an army of plumbers —mostly men who work alone—who seem incredibly hard to get hold of. They tend to be older, they learned on the tools or at a technical college, and they are happy to limit their income to squeeze below the £90,000 VAT restriction. There are many who, looking for a bit of holiday money, might do a job on the side for cash.
There is a real shortage of plumbers, joiners and electricians, in part due to the closing down of technical colleges, and the young pursuing non-vocational degrees while loading themselves with student debt. Historically and internationally, skilled tradespeople have been held in great esteem, although not so much in today’s Britain. We all know good tradespeople with a great client list and reputation, all of whom make excellent money and are their own boss. An early learn for all those people is that the VAT registration threshold is essential: they need to pay 20% beyond that £90,000. My key point is that these sole traders will not take on an apprentice or an assistant, because that would take them over the VAT starting point.
Not being VAT-registered is a fantastic advantage for a person. He or she has a 20% advantage over competitors who have several staff. In addition, the sort of person who likes being on the tools is not the sort of person who would relish the additional paperwork of being VAT-registered. It is not only doing the VAT paperwork that puts sole traders off growing their business; it is the real burden of hiring people, the payroll, the contracts of employment and the HR responsibilities. We need to make it worth their while, so an increase of a few tens of thousands will not do the job. There are 4.4 million self-employed people in the UK; just think what a catapult forward for our economy we would see if only 10% of them were to hire a couple of people.
I propose that the VAT starting level be increased from £90,000 to £250,000 for all businesses. If that happened, I predict that a massive number of microbusinesses would hire an apprentice or two, creating a pool of young plumbers getting trained. As the availability of plumbers increased, householders would get work done quicker, there would be more competition and therefore lower charges, and clients would be happier. Small businesses, having built up a bit of a scale with three employees, might then grow into a proper business with 100 or more employees, like Pimlico Plumbers.
It is believed that my proposal would cost the Treasury perhaps £2 billion in lost VAT, but I am sure that HMRC would win out overall. It would get income tax and national insurance from the newly-hired and well-paid staff, and the bigger companies would start paying corporation tax. It would also reduce the tax-avoidance cash economy. In my opinion, the 20% difference in the change from £90,000 to £250,000 would be easily made up.
Arguments are made that we should drop the threshold to zero and make all sales subject to VAT, but that would be a massive disincentive to people starting a business. The results of my proposed VAT change would be more people in well-paid employment, a gateway for the young into an excellent career, a solution to skilled trade shortages, a stimulant to the economy, and higher tax collected by the Exchequer—a win-win. Why would we want to incentivise millions of people not to hire youngsters, not to grow their businesses and not to pay more tax?
Daisy Cooper (St Albans) (LD)
It is a pleasure to serve under your chairship, Mr Vickers. I congratulate the hon. Member for Mid Leicestershire (Mr Bedford) on securing this important debate. It is a pleasure to wind up on behalf of the Liberal Democrats.
As we have heard from a number of colleagues, small and medium-sized enterprises are the heartbeat of our local economies. It is not just that they are the engine of growth: they have enormous social impact too. Whether it is the physios or beauty technicians who travel to people’s homes, sometimes to visit older people who are less mobile and cannot get out, or market traders selling the wares they have made at home, sole traders and small businesses bring real vibrancy to our local economies, and we must do everything we can to support them. I am proud that the Liberal Democrats have tabled various amendments to Government legislation to call for impact assessments on measures that affect small businesses, including the changes to national insurance contributions, the Employment Rights Bill and the business rates changes.
The jobs tax will hit small businesses particularly hard. The change in the threshold as well as the rates particularly gets small businesses. The Government’s proposals on business rates will be very difficult for small businesses. It is not just about the changes this year, with the bills going up; next year, under the Government’s proposals, small independent businesses will effectively subside the larger chains.
I say with some affection to the hon. Member for Strangford (Jim Shannon) that although he wishes he had the same Brexit as everyone else, he should be careful what he wishes for. I am sure he will know from Liberal Democrat research that since the Conservatives botched the Brexit deal small businesses have had to complete 2 billion extra pieces of paperwork thanks to Brexit red tape—enough to wrap around the world 15 times. I am sure none of us want to see additional red tape for small businesses and sole traders.
We have heard compelling arguments that the Government should at the very least look at the VAT regime. Do they have any plans to change it or review the threshold? We Liberal Democrats would welcome a review and would be keen to see any impact assessment that the Government might commission. There have been compelling arguments about simplifying the system. From what colleagues across the House have said, we know that the current threshold deters sole traders and others from earning more, which is really bad for growth.
Many people want to avoid the complicated form-filling, and I hear from my constituents that they also want to avoid the misery of sitting on the phone trying to get through to HMRC. We have all heard horror stories of people calling time and time again, only to have their calls cut off, unable to get through or get the advice they need. Will the Minister give an update on what is happening in HMRC to provide additional support for small businesses in particular? We know that those who are incredibly wealthy have a direct line to HMRC, but our small businesses—the engines of growth—often struggle to get the advice they need.
We urge the Government to simplify the VAT regime, and there are companies with proposals on how to do that. One quick example, which is slightly different from today’s topic, is that Amazon is working with HMRC to discuss cracking down on resellers, to tackle VAT tax avoidance by shell companies and avoid the situation many people experience when they order something from an online marketplace and either it is not very good quality when it arrives or it does not arrive at all. Conversations are happening about how to simplify the process for legitimate sellers on platforms. If there are big-eyed companies out there with ideas on how to simplify the VAT registration system, I very much hope the Government will take them up and roll them out not just to those who sell online but to those who sell in our communities.
Finally, the Minister will have heard over several months from colleagues across the House that small businesses are very different, and that one size does not fit all. Small businesses struggle with the paperwork, and do not have the lawyers or HR departments that larger businesses have, so I urge the Minister to consider proposals for a small business one-stop shop, to make sure that small businesses across the land receive the advice they desperately need.
Gareth Davies (Grantham and Bourne) (Con)
It is always a pleasure to see you in the Chair, Mr Vickers. First, I congratulate my hon. Friend the Member for Mid Leicestershire (Mr Bedford) on securing this excellent debate. We arguably do not spend enough time in this place discussing small and medium-sized businesses, which account for some three fifths of employment and half of all turnover in the entire private sector.
The good thing about having a debate on this subject is that we have the Government in the room, rather than behind their keyboards. That is important, because I noticed while preparing for this debate that it comes hot on the heels of a written question on the same subject, which I am afraid to say received a textbook non-answer from the Treasury. My hon. Friend the Member for Mid Leicestershire asked a perfectly reasonable question: will the Chancellor make an assessment of the growth impact of increasing the VAT registration threshold? That was a pretty direct question, yet the Minister’s response completely ignored the point about growth and instead merely stated that the threshold was £90,000. While we are very grateful for the answer, this is something that I am sure my hon. Friend already knew. As my hon. Friend is in this Chamber, I gently suggest that the Minister provide him with a fuller answer.
In some senses, raising the VAT threshold on SMEs would be a tax cut, so there is cause for optimism, given the Government’s newfound enthusiasm for cutting taxes—for those who live in Mauritius. If the Labour party is happy to take 80% of Mauritian workers out of income tax altogether as part of their £30 billion Chagos surrender deal, I am pretty sure they will be sympathetic to taking British SMEs out of VAT registration.
Surely the Minister will remember that last year, when we were in government, the Conservatives raised the VAT registration threshold to the current £90,000. That took 28,000 businesses out of registration, which helped them to compete and grow, and it reduced their administrative burden. We also introduced policies such as business rate relief and full expensing to reduce costs and encourage investment in our country. Put simply, we backed British businesses to drive economic growth. Contrast that with Labour’s approach—it is trying but failing to balance the books on the back of British businesses. In its very first year in office, Labour has introduced the £25 billion hike, and the reduction in the secondary threshold of employer national insurance contributions; the rise in business rates, which the party had promised to abolish, by the way; the £5 billion-a-year burden of the Employment Rights Bill; and, let us not forget, the inheritance tax raid on family businesses.
Mr MacDonald
The hon. Gentleman mentioned the increase in the registration threshold from £85,000 to £90,000, which came after many years of it not being increased and is far below inflation. In your time in office, you did no favours for small businesses, as far as VAT is concerned. Would you agree with that?
Gareth Davies
I think the hon. Gentleman is accusing you, Mr Vickers, rather than me. I simply say to him that increasing the threshold made a big difference to the 28,000 businesses that were taken out of registration. I encourage him to speak to businesses in his constituency that benefited from what is essentially a tax cut, in addition to all the other measures that I mentioned that we introduced.
The contrast between what the Conservatives did in office and the approach of the Labour Government in their first year is quite stark, and the consequences are even starker. Insolvency rates are at a 15-year high, new registrations have fallen at the fastest rate since the financial crisis, payroll employment is falling, and inflation is well above target and will be higher for longer. It is no wonder that only 14% of companies with fewer than 10 employees have confidence in the Chancellor’s growth plans. According to one survey, just 29% of UK small businesses are now predicting growth this year. Meanwhile, the Federation of Small Businesses reported that its members now view the tax burden as their second biggest barrier to growth.
Here we see very clearly the vicious cycle that Labour has fallen into, just as it did in the 1970s: higher taxes and higher inflation, leading to lower growth and lower revenues, leading to still higher taxation. That is why, even though the Chancellor promised British businesses that she would not be back for more, she is now refusing to rule out even more taxes and tax rises in the autumn Budget. That is no wonder, because the National Institute of Economic and Social Research forecasts a £60 billion shortfall in the public finances—and that was before we had Labour MPs in open revolt about the slightly tiny welfare reforms and an unfunded commitment to increase defence spending by £40 billion.
In that worrying context, I hope the Minister can stand up and provide some certainty to SMEs by giving his assurance that the next Budget will not see a reduction in the registration threshold, or indeed an increase in the rate of VAT. I would like him to stand up and rule those out right now, for all of us to hear. I know that these assurances will fall short of the increase in the registration threshold that my hon. Friend the Member for Mid Leicestershire and other Members are looking for today, but it will provide more certainty if the Minister rules those things out.
I would also be grateful for an update on the so-called new business growth service, which the Government promised would be a “one-stop shop” for advice and support. That was supposed to launch in the first half of this year, but the Government’s industrial strategy has apparently now had to push that back to later this summer. Perhaps one reason for the delay is that the best advice a business growth service could possibly give anybody is “Do not vote Labour”. That is clear for us all to see.
SMEs probably have quite a lot of advice of their own for the Government, but unfortunately the going rate for speaking to a Labour Minister is apparently £55,000, and one has to endure the inevitable gloom of the Labour party conference. In the spirit of this debate, perhaps the Minister could confirm whether the price tag for meeting him is before or after VAT. Either way, like most Labour policies, I expect it will bring in less revenue than was first hoped.
Gareth Davies
I am delighted that the Liberal Democrats are keen to meet us and are willing to pay for it. Perhaps we can speak afterwards, but his constituents can speak to me any time. We are always available, across the country.
This has been an excellent debate, with many views. It has highlighted the great importance of business to all our constituents, and I mean that seriously. The comments from colleagues on my side have illuminated the many different businesses that we have, whether it is Bloom Weddings, Chris and Annie’s business in the constituency of my hon. Friend the Member for Mid Leicestershire; the fish and chip shops Old Time Fisheries and Kirkgate Fisheries in Keighley and Ilkley, which no doubt provide fantastic fish and chips but are unfortunately reducing their hours, as my hon. Friend the Member for Keighley and Ilkley pointed out; or Carmela’s in the great constituency of my hon. Friend the Member for Broxbourne. All are having a hard time of it, but they remain excellent businesses. Some are, no doubt, places where we can all eat out.
The Liberal Democrats have made some important points. The hon. Member for Inverness, Skye and West Ross-shire (Mr MacDonald) spoke about plumbers, and the hon. Member for Mid Dunbartonshire (Susan Murray) about the hair and beauty salons and high streets in Mid Dunbartonshire.
This is an important debate to have. I am reminded of the last election when one party had a key policy in their manifesto around VAT thresholds, and that was Reform. However, I am afraid that when it comes to the hard graft of making the case in this place, the party is, yet again, nowhere to be seen.
I hope we can all agree that our country is stronger because of the men and women who get up every morning, go to work and drive our economy forward, as the hon. Member for St Albans (Daisy Cooper) said. At the heart of every successful economy is the simple fact that prosperity begins small. It begins with the family-run café on the high street, the corner shop, the book shop and the local butchers, and the single parent who is just launching their dream from their spare room or their garage. These are not just businesses. These are stories of people who had an idea, stuck it out and made it happen. When we pile on more and more burdens, when taxes climb too high and regulation tangles dreams in red tape, we do not just make it harder to do business; the hope of what might be possible completely dims. A free society depends on free enterprise. When we get out of the way and support small businesses, we are not just fuelling the economy but lifting communities. My hon. Friend the Member for Mid Leicestershire believes that lifting the VAT threshold will help achieve that, and I look forward to the Minister’s response.
The Exchequer Secretary to the Treasury (James Murray)
It is a pleasure to speak with you as Chair, Mr Vickers. I congratulate the hon. Member for Mid Leicestershire for securing this debate. I feel that I am letting the side down by not having a quote from Napoleon to open my remarks, but I listened carefully to the hon. Member’s contribution to the debate, and to the contributions of all hon. Members, including the shadow Minister—the hon. Member for Grantham and Bourne (Gareth Davies) —and the Liberal Democrat spokesperson, the hon. Member for St Albans (Daisy Cooper). I hope that my remarks will address most of the points that they raised.
It is clear from all hon. Members’ contributions to this debate that, across the House, we agree on how valuable small businesses and entrepreneurs are to the local economies and communities in the areas we represent. As a Government, we recognise that contribution. Before I turn to the VAT threshold, the focus of this debate, I will briefly set out the wider support that the Government are providing to the small businesses that are so important in our constituencies across the country. That support includes measures set out only yesterday in the industrial strategy. A new business growth service will streamline small businesses’ access to Government support, advice and funding, providing the access that the Liberal Democrat spokesperson asked about. Reforms to public procurement will help small businesses to secure Government contracts. We will help small businesses to adopt new technologies. We will continue to tackle the challenge of late payments to SMEs. The Government are also planning to publish an SME strategy later this year, giving more detail on the Government’s wider offer for small businesses.
Hon. Members will also be aware that the Chancellor recently announced the 2025 spending review, which contained measures to support small businesses. In particular, the Chancellor increased the financial capacity of the British Business Bank to £25.6 billion, which will enable a two-thirds increase in support for small businesses across the UK. That support in the spending review sits alongside the Government’s support for small businesses through the tax system. We have more than doubled the employment allowance to £10,500 and expanded it to all eligible employers. We have frozen the small business rates multiplier to protect small properties from inflationary bill increases to business rates. We are introducing permanently lower business rates for smaller retail hospitality and leisure businesses from 2026, and we have committed in the corporate tax road map to maintaining the small profits rate and marginal relief at their current rates and thresholds, as well as maintaining the £1 million annual investment allowance.
I will now turn to the VAT threshold, which is the focus of this debate. As several hon. Members have said, a number of businesses have raised concerns about that threshold. In particular, they are concerned that the cliff edge of the £90,000 threshold, as it is, may disincentivise businesses that are close to the threshold from growing and surpassing it, and they have connected concerns about the level at which the threshold is set.
Let me first address the argument that the threshold disincentivises small businesses from growth as they approach it. I acknowledge that some businesses will take legitimate action to avoid reaching the VAT threshold, and will bunch just below that threshold. However, those businesses are a minority, accounting for around 0.5% of all businesses that are not VAT-registered. Some businesses, and indeed some hon. Members in this debate, have suggested that the Government should introduce a taper mechanism, in which the amount of VAT that businesses must charge is phased in. However, there is little evidence to suggest that a taper would tackle the bunching of businesses just below the threshold, although it would add additional complexity to the tax system. At £90,000, the UK has a higher VAT registration threshold than any EU member, and the joint highest in the OECD. That threshold keeps most UK businesses out of VAT altogether.
Mike Martin
I am sure that the Minister is aware that the UK is one of only three countries in Europe that does not offer a lower rate of VAT for hospitality and tourism. For example, France, Italy and Spain charge only 10% on those sectors. Will he consider lowering the rate for those sectors as part of the UK’s VAT regime to give our high streets the boost they need?
James Murray
I will turn to the questions that the hon. Gentleman and other hon. Members have raised about VAT reliefs in a moment, but I will first finish the point about where the VAT registration threshold is set, because that is an important part of the debate.
It is worth reflecting on the fact that views on the threshold are divided. The case for change has been regularly reviewed over the years, because some businesses argue that a higher threshold would reduce their administrative and financial burdens. However, other businesses contend that a lower threshold would provide a fairer competitive environment, for instance in the hair and beauty sector.
The Government’s approach to the VAT threshold and applicable rates aims to balance the potential impacts on small businesses, including their growth and financial sustainability, with the economy as a whole and, of course tax, revenues. Although the Government always welcome hearing businesses’ views about how the tax system operates, we are not currently planning to change the design of the VAT threshold.
More broadly on VAT, the Government often receive calls from businesses, and indeed from hon. Members, to examine the rate of VAT for specific industries. VAT is a broad-based tax on consumption and the 20% standard rate applies to most goods and services. VAT is the UK’s third largest tax and is forecast to raise £180 billion in 2025-26. Of course, tax breaks have an impact on the public finances and they must represent value for money for the taxpayer, so exceptions to the standard rate have always been limited and balanced against affordability considerations. The assessment of any new VAT relief should consider whether the cost saving is likely to be passed on to consumers.
Fundamentally, the best support that we can provide to small businesses is economic growth. Delivering secure, strong and sustainable growth to boost prosperity and living standards across the UK is the Government’s No. 1 mission, as set out in our plan for change. That is why, when we took office, we took the necessary decisions to provide the stability that is so important for investment and growth by tackling the £22 billion hole in the public finances that we inherited from the previous Government.
Robbie Moore
I struggle to understand how the Minister can come out with these pre-written speeches and expect anyone to believe him. How can he say that stability has now been put back into the wider economy when many hard-working businesses, including the SMEs that many hon. Members have talked about in this debate, are struggling to deal with the consequences of employer’s national insurance contributions rising; the consequences of VAT, which we are debating today; and the consequences of the Employment Rights Bill, which are coming down the line? Yet he still stands at the Dispatch Box and comes out with the bizarre claim that the Government have installed stability with their plan for change. That is nonsense.
James Murray
I think the hon. Gentleman must be forgetting the recent history of this country’s economy when his party was in charge, because the many small businesses that I have met are not clamouring for a return to the economic chaos that we saw under Liz Truss or the 14 years of economic stagnation that his party presided over. The stability that we restored to the public finances and to the economy is an essential prerequisite for investment and growth; indeed, it is the foundation on which economic growth can succeed.
Mr Angus MacDonald
I am reluctant to come in on the side of the Opposition on this issue, but I can tell the Minister that my constituency has never suffered as much in my whole business career as it has since the Budget last year. National insurance increases and related increases have absolutely crucified business up there. If the Government cared to come up to the highlands and come round local businesses with me, they would be in for a real shock, but I strongly recommend that they do so.
James Murray
I do not recall the hon. Gentleman ever opposing extra investment in the national health service during his interventions in the main Chamber, because, of course, the decisions that we took around employer’s national insurance contributions were taken to stabilise the public finances and put our public services back on their feet. We acknowledged at the Budget last year, when we took those difficult decisions, that they would have consequences. However, we also acknowledged that no responsible Government could have let things continue as they were, or taken what we inherited from the previous Government without putting public finances back on a firm footing.
That is exactly what we have done from our first day in office. Alongside that essential work to steady the public finances, we have been removing barriers to growth by overhauling the planning system, launching a new National Wealth Fund and reforming our pension system to unlock billions of pounds. At the spending review earlier this month, we saw the Chancellor marking a key step in our growth mission by allocating substantial new capital investment to ensure that growth is felt across the country.
That investment will be further bolstered in the coming months by other reforms, including the industrial strategy published yesterday, and the 10-year infrastructure strategy published last week. A rising economic tide lifts all boats, big and small, and this Government believe that that should be the most important priority for supporting small businesses.
Lewis Cocking
We have all mentioned a number of businesses that think this Labour Government are taking the wrong direction. Can the Minister list the businesses in his constituency that believe that this Labour Government are taking the right direction for business growth in this country? If he lists the businesses in his constituency, we will go and ask them.
James Murray
I would typically ask businesses’ permission before I named them in the House of Commons, but I can reassure hon. Members that in conversations with businesses in my constituency, or indeed across the country in my role as a Minister, they understand the difficult decisions we took to restore stability to the public finances and to the economy. That is not to pretend for a moment that those decisions were not difficult and do not come with consequences, but most businesses I speak to recognise our difficult inheritance from the previous Government, and the importance of restoring stability to the public finances as an essential prerequisite for investment and growth.
What is most important is working hand in hand with businesses—whether they are small businesses in our constituencies or large businesses that operate across the country—and putting through the reforms that we know are needed. That includes making sure that the planning system is reformed, that the National Wealth Fund supports their investment, and that we are investing across the country to ensure there are jobs and growth in every part of the UK. That is what we are focused on, working in partnership with businesses, because we know how important that is.
Jim Shannon
Irrespective of the Windsor framework and the protocol issue, I understand that experts and businesses have suggested that the VAT threshold should be £250,000. The hon. Member for Inverness, Skye and West Ross-shire (Mr MacDonald) referred to the fact that that would enable businesses to perhaps employ one or two apprentices or extra people in their companies, and help them to focus on a strategy for growth, which I know the Minister is committed to. Are there any circumstances in which the Minister would consider a £250,000 threshold, because of the benefits that it would clearly bring to all businesses in the United Kingdom?
James Murray
I thank the hon. Gentleman for his question. He referred to the impact of the Windsor framework, which as he correctly pointed out, imposes an upper limit of just over £90,000 on the threshold in Northern Ireland. The Windsor framework is therefore relevant to the threshold in Northern Ireland and, by extension, to the Government’s decisions in Great Britain as well. The debate is becoming slightly wider than the question about the VAT threshold, but I can understand why that is the case. The VAT threshold—in fact, VAT as a whole—is only one of the factors in the landscape that businesses face.
Although we recognise that we have taken some difficult decisions on employer’s national insurance contributions, as I said earlier, the important point to focus on is the stability that those decisions have brought to the public finances and that they have put our public services back on their feet. Many businesses that I speak to recognise that they need their workforce to be healthy and to be able to get on a train and get to work.
Businesses need people who are coming out of school to be trained and to have the right skills to access the jobs of the future. They need the Government to create the right environment for growth, because private sector businesses will drive growth and create wealth and prosperity across the country. Businesses want a partner in Government who will provide the infrastructure, reforms and investment to enable them and everyone across our country to flourish. That is the wider context in which this debate takes place.
This debate has mostly been about the VAT threshold. It has taken a wide definition of the VAT threshold and its connected policies, but I understand why: the threshold sits within a wider context that affects small businesses. We all agree that small businesses are at the heart of all our local communities and economies, and we all want them to thrive. That is why the Government have taken steps to ensure that the tax system supports them. We have doubled the employment allowance, increased the small employers’ compensation rate, frozen the small business multiplier, introduced permanently lower business rates for smaller retail, hospitality and leisure businesses from next year, and committed to maintain the small profits rate and £1 million annual investment allowance.
The industrial strategy, published yesterday, goes even further to support small businesses, including by announcing the creation of a new business growth service that will streamline access to Government support, advice and funding for small businesses. The VAT threshold strikes a balance between keeping the majority of businesses out of VAT altogether while ensuring that we can support public services and maintain fiscal responsibility.
I thank you again for your chairmanship, Mr Vickers. I thank all hon. Members who have contributed to the debate and, in particular, I thank the hon. Member for Mid Leicestershire for securing the debate.
Mr Bedford
I thank the Minister for his speech. I ask him to take back to the Treasury the various arguments that have been put forward today, particularly about the benefits for the broader economy and for our local communities that could be achieved by reviewing the VAT registration threshold.
I thank the hon. Member for Mid Dunbartonshire (Susan Murray), who spoke about the benefits of doing so. She said that local businesses foster community pride, but that the tax system is very complicated for them.
I thank my hon. Friend the Member for Broxbourne (Lewis Cocking), who said he is frustrated that the current system does not have a taper mechanism. I ask the Minister to look at that and consider my hon. Friend’s arguments about how that would benefit small businesses—particularly those that wish to grow.
I thank my hon. Friend the Member for Keighley and Ilkley (Robbie Moore), particularly for his arguments about the fish and chip shop industry and similar small businesses that are holding back their growth because they are on the cusp of the registration threshold. If they surpass it, additional costs and burdens will be placed on them.
The hon. Member for Strangford (Jim Shannon) spoke about his frustrations, which I share, about how the Windsor framework constricts businesses in Northern Ireland and prevents them from being more competitive and on a par with those in the rest of the United Kingdom. I appreciate the intervention of the hon. Member for East Londonderry (Mr Campbell) on the same point.
I thank the hon. Member for Inverness, Skye and West Ross-shire (Mr MacDonald), who has particular expertise with VAT. As someone who holds apprenticeships and skills training in high regard, I appreciate his point that reviewing the threshold could enable smaller businesses to take on additional employees and train them in the trades that we need. Plumbers, electricians and other trades would really benefit from apprenticeships and similar types of training.
I thank the hon. Member for St Albans (Daisy Cooper), who spoke about the need for small businesses to be better supported, particularly by the Treasury, in dealing with the bureaucracy. She said that small businesses do not have the advantage of large HR functions or support networks to get them through the bureaucracy.
I thank my hon. Friend the Member for Grantham and Bourne (Gareth Davies) for his points. He said that three fifths of employment in this country is in a small business, and that, particularly over the last year, businesses have had to contend with significant challenges posed by the new Government’s economic plan, including the national insurance hike, the business rates increase and the additional burdens placed on businesses by the Employment Rights Bill.
Question put and agreed to.
Resolved,
That this House has considered the impact of the VAT registration threshold on SMEs.