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Steve Corrick says he must close his Somerset tearoom to avoid falling into a 'tax trap'
A small tearoom owner has urged the Chancellor to change VAT rules in her Budget.
Steve Corrick said current tax rules have forced him to close his Somerset cafe one day a week, to avoid making too much money.
He said the situation “means we're not employing people today, we're not serving the local community, it's crazy”.
The former accountant calculated that by opening his business every day, the business would take in just enough money to pay VAT, but would then actually be worse off than if it earned less.
Is he right? And how many others are stuck in the same tax trap?
The cakes are tempting, but the tea room said they couldn't sell too many or it would result in a tax bill.
Mr Corrick and his partner Linda only took over the tea room in the summer.
He had retired from a successful career as an accountant and was therefore interested in the books of the small business.
He said he quickly spotted a problem.
Axbridge's tearoom was in danger of making too much money.
Small businesses earning less than £90,000 are exempt from paying VAT on their customers. But the rules state that once that threshold is exceeded, sales tax must be charged on every transaction.
Cliffside cafe
Mr. Corrick put it this way.
“If we take £90,000, we pay no tax. But if we take a pound more, we have to pay £15,000 in VAT on the whole lot.
“They call it ‘the cliff’s edge,’ and it’s just crazy.”
The tea room occupies a medieval building which was, for centuries, an alms house.
A place of charity. But Mr. Corrick doesn't want to work for nothing.
“Our situation will actually be worse if we accept more than £90,000,” he explained.
The Tea Shop occupies an old medieval building in the center of the Somerset town
Of course, coffee is unlikely to gain even a pound over the limit.
So how much more should they take, I wondered, to make it worth paying 20% VAT?
“We would need £140,000 a year,” he explained.
“To earn more, you would have to be open longer, which means more wages, more energy, more maintenance.
“It’s only at £140,000 that we would really start to make more money.”
To recoup the tax paid, the café must earn more money, which increases its costs. Profit margins are low, so to make enough extra profit to cover VAT, the business needs to take an extra £50,000.
And no, this problem doesn't just affect one tea room in Somerset.
“An obstacle to growth”
In a recent survey, the Federation of Small Businesses (FSB) found that 38% of businesses with a turnover around the £90,000 threshold cite VAT rules as a major barrier to growth.
“They don't want to go over that threshold and suddenly have to pay a lot of tax,” said Sam Holliday, FSB organizer in Somerset.
The FSB calculates that if the VAT threshold had been increased each year in line with inflation, it would now be above £120,000, not £90,000.
“This has become a major problem for many small businesses.”
New Labor chancellor Rachel Reeves has plenty of people giving advice on how to help businesses grow.
In a small medieval tea room in Somerset, Steve Corrick has his own plea.
“Fix this, otherwise businesses will be held back.”
