Budgeting for change to VAT will not be simple

AS THE Chancellor looks for ways to balance the books and stimulate growth in her Budget next month, one policy lever that is once again under scrutiny is the VAT threshold.

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Chancellor of the Exchequer Rachel Reeves

(Paul Grover/Daily Telegraph/PA Wire)

At present, businesses with a turnover below £90,000 do not need to register for VAT, but there are growing calls for reform, ranging from scrapping the threshold to raising it further, to designing flexible systems that avoid the cliff-edge problem.

The VAT threshold was originally designed to spare the smallest firms from the red tape of filing returns, keeping digital records, and navigating one of the most complex tax systems in the world. Yet in recent years, it has increasingly been seen not as a relief but as a distortion.

Critics argue that the current threshold has become one of the most significant brakes on small business growth, with evidence suggesting that many entrepreneurs deliberately limit sales, delay contracts, or even close for part of the year to avoid crossing the line resulting in a “cliff edge” that actively suppresses expansion.

Abolishing the threshold would remove this artificial barrier, as it would allow businesses to grow freely without worrying about the sudden imposition of a 20% tax charge on their turnover.

It would also create a more level playing field, since firms just under the line currently enjoy a competitive advantage over VAT-registered rivals, especially in consumer-facing sectors.

For companies, abolition may even be a net benefit, as these firms could reclaim VAT on purchases and pass on the cost to their clients without loss of competitiveness, since their customers are VAT-registered too.