Decreasing the VAT threshold in the Autumn Budget would increase inflation
The chancellor, Rachel Reeves, will trigger increased inflation if she reduces the VAT threshold in the Autumn Budget, say leading audit, tax and business advisory firm, Blick Rothenberg.
Gabby Donald, a partner at the firm, said: “Despite concerted advocacy from some think tanks, the chancellor, Rachel Reeves must not reduce the VAT threshold in the Autumn Budget. The initial impact would be inflationary as more businesses become obliged to charge 20% VAT on top of any price increases to cover their additional compliance costs. Businesses providing services to consumers would be particularly affected.”
She added: “The case for arguing that a significant cut to the VAT registration threshold will stimulate growth is far from clear cut. A sudden, material reduction in the current £90,000 VAT threshold would bring large numbers of small businesses into the scope of quite a complicated tax. The impact of higher prices on consumer spending is likely to hit business’s profitability and in turn investment and employment.”
Gabby said: “Reducing the threshold is unlikely to yield a significant increase in the tax take for the Government. HMRC’s VAT statistics for 2023 / 2024 show that more than 77% of the total VAT take of £168bn is paid by businesses with turnovers of £10m+. Only about £3.9bn in total is paid by businesses with turnovers of £150k or less, with the total VAT payable typically lower the smaller the business. If the threshold was reduced materially, greater demands would be placed upon HMRC but very little would be gained fiscally.”
She added: “Many of the think tanks and academics that favour bringing the threshold down significantly or removing it often talk about the benefits seen in smaller countries like New Zealand. But the UK economy and VAT system differ significantly from New Zealand, which has a much less complex equivalent to VAT, the Goods and Services Tax (GST) system, and the number of registered businesses will be much lower than would be the case in the UK.”
Gabby said: “There are roughly 2.7m VAT registered UK businesses in comparison to the total population of New Zealand, which is about 5.3m. While there is some evidence that the current UK VAT registration threshold inhibits growth, with businesses limiting their activities to remain beneath the threshold, the case for a drastic reduction in a large economy like the UK’s is far from proven. To implement this type of change quickly would be an extremely bold experiment.”