A key member of Rachel Reeves’ Treasury team championed proposals to slash the threshold for businesses to pay VAT to £30,000, it has emerged, fuelling speculation the measure could be implemented as the chancellor seeks to raise billions to fill the Budget black hole.
Pensions minister Torsten Bell backed plans to introduce a “sharp cut” to the rate at which small businesses begin to pay VAT in his previous role as chief executive of the Resolution Foundation think tank.
The Resolution Foundation’s Economy 2030 report, co-authored by Mr Bell in September 2023, recommends “reducing the UK’s unusually high and distortionary VAT registration threshold.”
An earlier piece of research published as part of the same Resolution series also describes the current threshold as a “disincentive to growth and the formation of multi-employee firms.”
It adds: “The UK’s VAT registration threshold is the highest in the world. This means that the Treasury is missing out on VAT revenue; moreover, the prospect of crossing the threshold deters small firms from growing.”
“A sharp cut in the threshold, from £85,000 to around £30,000, could raise £2 billion a year and provide a small boost to economic activity.” The VAT threshold rose to £90,000 in April 2024.
A similar proposal was put forward to the Treasury Committee last month by tax expert Dan Neidle. The current system “stops small businesses growing,” the Tax Policy Associates founder said, urging the government to reduce it to the point that only “hobby businesses” could be exempt. This change could potentially be offset the small cut to business rates, he added.
The Treasury did not rule out the proposal.
A Treasury spokesperson said: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.”
Industry leaders for small businesses have said the government “would be out of its mind” to adopt the proposals, as they would “would drive strivers away from Labour.”
Tina McKenzie, Policy Chair, Federation of Small Businesses (FSB), said: “It’s difficult to imagine a more out-of-touch restart to the government than attacking skilled trades in this way.
“With the new top priority of Keir Starmer’s revamped operation to get more money into people’s pockets, it’s much more likely the government will increase the threshold, let people increase their income and generate more tax revenues than the opposite.”
The FSB “remains in discussions on increasing the VAT threshold,” she adds.
Alongside larger traders, many small businesses also continue to criticise the financial impacts of last years’ increase to employer National Insurance contributions and increase to the national living wage.
Under current rules, businesses do not need to pay any VAT if the total value of everything it sells remains under £90,000 a year. This is called its ‘taxable turnover’ and applies to all non-exempt items.
If a business goes past this threshold, it must then register for VAT and pay for it on all sales.
With the rate of VAT at 20 per cent, this means if a business goes over the threshold by even a pound, the owners will find themselves liable to pay around £18,000 to HMRC which they must either pass on to customers or absorb into costs.
This system has been called a ‘cliff-edge’ by industry experts, as it can incur a sudden shock to a small business’ ability to trade.
Small businesses are those with fewer than 50 employers, such as independent caterers, tradespeople, hair salons and gardening companies.
An HMRC report published in September 2024 even found that some businesses were limiting their growth to avoid having to pay VAT. This could involve halting work for a month or two, pretending to be on holiday, or asking customers to pay for upfront costs like materials.
One anonymous business owner told researchers: “Because I knew roughly how much I earned and spent last year, I’ve kept it in the realms of last year without having to turn work away…. Instead of saying I can’t do something I would say I am on holiday for a whole month. That sort of thing.”
The Resolution Foundation report co-authored by Mr Bell addresses this, recommending “lowering [the VAT threshold] to the point where almost no business owner would consider the option of deliberately staying below that level of turnover.”
During his tenure as chief executive of the foundation, Mr Bell also backed a number of progressive policy and taxation measures. These included an end to the two-child benefit cap, unfreezing housing benefit rates, and introducing a ‘social tariff’ which would effectively means-test energy bills.
