Labour-backing tax campaigners want chancellor Rachel Reeves to raise more revenues from the last of these three taxes: VAT. She may be tempted to do so. There’s a way she could boost VAT revenues without changing the headline rate.
VAT, which stands for value added tax, is a flat rate charge applied to most products and services we buy. It’s the UK’s third-largest tax, after income tax and NI.
In 2023/24, receipts totalled £169.25billion. By comparison, inheritance tax generated just £7.5billion.
VAT is charged at a flat rate of 20% which falls to 5% on home energy bills. New housing, children’s clothing and most foods are zero-rated.
If Reeves hiked the 20% charge or scrapped VAT exemptions, this would spark even more outrage than her move to abolish the winter fuel payment for 10million pensioners.
I doubt she’ll do that. But there’s something else she could do. Small business owners will hate it. So will their customers, as they’ll foot the bill.
Today, businesses only have to register for VAT if their annual turnover tops £90,000.
Former Tory chancellor Jeremy Hunt increased the threshold from £85,000 in his March Budget saying it would “reduce the administrative and financial impact” of the tax and encourage them to invest and grow.
Now campaigners want Labour to slash the VAT registration threshold to £45,000 or even £30,000. This would smother small businesses in red tape but could happen.
VAT-registered businesses must keep records of everything they buy and sell, send a VAT return to HMRC every three months, and pay any tax due. There are hefty fines for getting it wrong.
It’s a lot of cost and bother for people who are already working flat out. Many deliberately hold their annual income below the £90,000 threshold to avoid it.
Many tax experts want to put a stop to that, including Labour’s new advisor Sir Edward Troup. When Hunt hiked the VAT registration threshold to £90,000 he said halving it instead “would have been a better way to remove a barrier to growth.”
This will see ordinary people pay more VAT, too. Here’s just one example. If your plumber is registered for VAT, they are required to add an extra 20% to customer invoices to accommodate the added tax.
Households will pay this and can’t claim it back. Hence the VAT hike.
Think tank The Resolution Foundation, led by former Labour adviser Torsten Bell, thinks it’s a great idea. In fact, he wants to go even further.
He has proposed slashing the VAT registration threshold to just £30,000, claiming that today’s higher threshold “acts as a disincentive for small firms to grow”.
That could hit more than 500,000 businesses. And of course their customers.
It would bring in an estimated £1billion. That could rise if Bell is correct and tens of thousands of small firms expand their turnover beyond £90,000.
However, others could limit theirs to £30,000 or simply give up.
Can Reeves hike the VAT registration threshold without being accused breaking a manifesto pledge? Unlikely. Would smaller businesses thank her for doing so? No. Will their customers happily pay 20% more? Definitely not. Will she do it anyway? We’ll find out in her autumn budget on October 30.
