Top member of Reeves’ Budget team previously backed plans to hit small businesses
It has been revealed that a key member of Rachel Reeves’ Treasury team supports proposals to reduce the threshold for businesses to pay VAT to £30,000; This has fueled speculation that the measure could be introduced at a time when the chancellor is trying to raise billions of dollars to fill the Budget black hole.
In his previous role as chief executive of the Solution Foundation think tank, pensions minister Torsten Bell backed plans to introduce a “sharp cut” to the rate at which small businesses start paying VAT.
The Resolution Foundation Economy 2030 report, which Mr Bell co-authored in September 2023, recommends “lowering the UK’s unusually high and distorted VAT registration threshold”.
An earlier study published as part of the same Solution series also describes the current threshold as “an impediment to growth and the formation of multi-employee firms.”
The report adds: “The UK’s VAT registration threshold is the highest in the world. This means the Treasury is deprived of VAT revenue; furthermore, the prospect of exceeding the threshold deters smaller firms from expanding.”
“A sharp reduction in the threshold from £85,000 to around £30,000 could raise £2bn a year and provide a small boost to economic activity.” The VAT threshold rises to £90,000 in April 2024.
A similar proposal was presented to the Treasury Committee last month by tax expert Dan Neidle. The founder of Tax Policy Associates said the current system “stops small business growth” and called on the government to reduce it to the point where only “hobby businesses” can be exempt. This change could potentially offset the small cut in business rates, he added.
The Treasury did not reject the offer.
A Treasury spokesman said: “As set out in the Change Plan, the best way to strengthen the public finances is to grow the economy, which is our focus. Changes to tax and spending policy are not the only way to do this, as reflected in our planning reforms which are expected to grow the economy by £6.8bn and reduce borrowing by £3.4bn.”
Small business sector leaders said the government would be “out of its mind” to accept the proposals because they would “leave the pushers away from Labour”.
Tina McKenzie, Head of Policy at the Federation of Small Businesses (FSB), said: “It is hard to imagine a more out-of-touch restart than this government assault on skilled tradesmen.
“With Keir Starmer’s revamped operation’s new top priority of getting more money into people’s pockets, it is much more likely that the government will increase the threshold, allowing people to increase their incomes and generate more tax revenue.”
He adds that the FSB “continues discussions on increasing the VAT threshold.”
Many small businesses, as well as large traders, continue to criticize the financial impact of increases in employer National Insurance contributions and the increase in the national living wage in recent years.
Under current rules, businesses do not need to pay any VAT if the total value of everything they sell remains below £90,000 a year. This is called ‘taxable turnover’ and applies to all non-exempt items.
If a business exceeds this threshold, it must register for VAT and pay for it on all sales.
At a VAT rate of 20 per cent, this means that if a business exceeds the threshold by even one pound, business owners will find themselves liable to pay around £18,000 to HMRC and must either pass this on to customers or cover the costs.
This system has been called ‘cliff edge’ by industry experts as it can cause a sudden shock to a small business’ ability to trade.
Small businesses are businesses with fewer than 50 employers, such as independent caterers, tradespeople, hairdressers and gardening companies.
An HMRC report published in September 2024 even revealed that some businesses were limiting their growth to avoid having to pay VAT. This might include stopping work for a month or two, pretending to be on vacation, or asking customers to pay upfront costs such as supplies.
One anonymous business owner told researchers: “Because I knew roughly how much I earned and spent last year, I kept it in last year’s world without having to turn down work… Instead of saying I can’t do something, I can say I’m on vacation for a month. That sort of thing.”
The Resolution Foundation report, co-authored by Mr Bell, addresses this issue and recommends: [the VAT threshold] It has gotten to the point where almost no business owner will deliberately consider the option of staying below that level of turnover.”
During his time as chief executive of the trust, Mr Bell also supported a number of progressive policies and taxation measures. These included ending the two-child benefit cap, lifting the freeze on housing benefit rates and introducing a ‘social tariff’ that would effectively test energy bills.
