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VAT Thresholds Impact on SMEs: Analysis and Solutions

Explore the impact of VAT thresholds on SMEs, with insights on compliance challenges, equity issues, and possible solutions. Learn about varying thresholds across OECD countries and their implications for small businesses. Discover effective audit approaches for SMEs and strategies to enhance compliance.

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VAT Thresholds Impact on SMEs: Analysis and Solutions

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  1. SMEs – SOME VAT ISSUES David Holmes OECD

  2. THRESHOLDS • Most countries employ thresholds for registration or tax collection • Across OECD countries: large variation • Zero to US$250,000 • EU variations • Zero to nearly US$100,000

  3. THRESHOLDS – GOOD • Bulk of tax comes from a few very large businesses • Smaller businesses may be more costly to administer • Smaller businesses can be less compliant • Compliance costs for SMEs are disproportionately high

  4. THRESHOLDS – BAD • Equity – no commercial advantage to smaller businesses • Cliff-edge syndrome – one day no VAT, next day VAT • Disincentive to grow a business • Encourages avoidance (fragmenting businesses) • Impact on income tax administration

  5. THRESHOLDS – SOME THOUGHTS • Variable thresholds • goods • services • Is equity really an issue? • Allow voluntary registration • Presumptive tax schemes

  6. SMEs and COMPLIANCE • Many SMEs deal in cash trades • Audit approaches • Large businesses = system audit • Smaller businesses = system audit plus • Test through credibility checks • Build up good risk analysis tools

  7. SMEs and COMPLIANCE • Identify riskier businesses (and trades) • Test credibility • Mark-up purchases to expected sales • Cash reconciliation • Other novel approaches can be used • Most want to be compliant • Educate and support

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