Small businesses offered flat-rate

The smallest businesses will be able to calculate their VAT in a new way, which tax experts say should free up the administrative burden they face.

Under a package of measures designed to "ease the impact of VAT" on small businesses, Gordon Brown said he would consult about a "flat rate scheme" for businesses with a turnover of under £100,000.

Richard Watson, VAT partner at PricewaterhouseCoopers, described the proposal as a "real step change." Instead of having to add up all VAT liabilities and credits separately, small firms would be able to calculate their liabilities as a percentage of turnover.

Mr Watson said that, while this might involve a higher tax charge for some businesses, because the scheme appeared to be voluntary those companies which might be hit would be able to stick with their current method of paying VAT.

In his statement the chancellor said he wanted to generate the same amount of VAT payable but simplify the process, although he stressed the scheme was open to consultation.

Other measures proposed by Mr Brown to reduce VAT administration involved include extending the cash accounting scheme to another 40,000 traders by raising the turnover limit from £350,000 to £600,000. Under this scheme, traders are charged tax on money they receive rather than invoices they issue.

The chancellor also intends to allow at least 100,000 more businesses to file their VAT returns on an annual rather than quarterly basis.

He claimed that the VAT threshold would remain the highest in Europe as a result of increasing the limit in line with inflation. This would allow another 8,000 business to operate without charging VAT to customers.

The government also aims to offer better advice to small businesses by setting up a national centre for their general inquiries.