Any business in the UK with a turnover >£85,000 has to register for value added tax (VAT). Quarterly VAT returns can be crippling for SMEs (small and medium sized enterprises), especially post-covid and as we go through a cost of living crisis.

Except for certain exemptions, businesses that pay VAT do so at 20% of the product/service sale. For example, if a product/service is sold for £60 (total), the net value is £50, and the VAT is £10. This £10 is then owed to HMRC.

VAT returns can be offset by business purchases, providing the business purchases from other VAT registered businesses, and the product is not exempt from VAT. 

This means that when a business buys and sells PRODUCTS, the VAT owed to HMRC can be reduced. For example, if a business buys 3 materials with a total cost of £120, they will pay the supplier £100 net + £20 VAT. If the business then assembles the materials into their specialised product and sells on to their customer for a total of £240, the customer pays £200 net + £40 VAT. At the end of the VAT quarter, HMRC would owe £20 to the business, and the business would owe £40 to HMRC; the businesses VAT return is offset by 50%, therefore they owe HMRC £20. 

This VAT model is not fair across businesses. Where a business provides a SERVICE, for example, a gym selling gym memberships, there is no "material" to purchase and sell on, so nothing to offset the VAT return.

For example, if a gym membership is £60, the member pays £50 net + £10 VAT. At the end of the VAT quarter, the business owes HMRC 100% of the VAT of the membership (£10).

This petition therefore proposes a reduction to the VAT on services from 20% to 5% for SMEs, creating a fairer system across business types. This aligns with other products and services on a reduced VAT rate including energy (de minimus). 

The government already did something similar for leisure centres (local authority managed) deeming that their services are classified as "non-business" supplies for VAT purposes. They fail to acknowledge other service-based businesses, further showing how unfair the VAT system is. 

This is needed now more than ever. As customers disposable incomes are reduced due to increases in the cost of living, businesses are doing everything they can to keep costs down. For SMEs, this is proving impossible as business overheads are continually increasing. In April, minimum wage will be increased by almost £1/hr; this may be good news for employees, but the further strain on SMEs will squeeze profits making it unmanageable for them to afford staff, impacting their ability to offer jobs to young people in particular. Many young people rely on SMEs to gain the work experience needed to get them into further education or onto their chosen career path. 

A reduction to VAT on services would allow these SMEs to keep costs down, making it more plausible to maintain their business and their employees.