Government defends VAT threshold amid calls for reform

The Westminster Hall debate on 24 June was opened by Peter Bedford (Con) who described the  threshold of £90,000 as ‘arbitrary’. Bedford, a chartered accountant by background, said the threshold burdened small businesses with compliance and led to higher costs for customers. He called on the government to review the VAT registration threshold, arguing that industry concerns had ”fallen on deaf ears”.

He cited the Institute of Chartered Accountants, who have called for the simplification of the VAT system and a review of the registration threshold. Bedford believed the proposals could reduce compliance costs and give small businesses room to grow. And he praised the approach taken in Singapore, where businesses are incentivised to expand their activities.

Bedford said he was calling for “a modest and sensible change that would make a real difference to entrepreneurs across the country”.

Susan Murray (Lib Dem) said that the current VAT threshold was a “substantial barrier” preventing SMEs from expanding, hampering ambition and penalising success. Murray told MPs that the “leap” to becoming VAT registered increased compliance costs and threatened competitiveness. She added that this allowed non-VAT-registered competitors to undercut prices, “placing growing businesses at a distinct disadvantage”. She called for a smoother transition or targeted administrative support to encourage growth.

Lewis Cocking (Con) said the government has promised to be pro-business but that they had “not come up with a single policy that has helped… business owners”. He said the government should introduce a “taper mechanism” to remove the cliff edge. Cocking’s concerns were echoed by another Conservative MP, Robbie Moore.

Jim Shannon (DUP) said the Windsor framework meant that VAT in Northern Ireland would not be allowed to rise above the £90,000 threshold. He said raising the threshold to £250,000 would aid small business growth and wouldn’t hurt overall VAT revenues. He continued: “When most businesses register for VAT, they are faced with a choice: either increase their prices by up to 20% or lose 20% of their existing prices as VAT. That is a difficult scenario for a business.”

Shannon cited HMRC research from 2016, which found a fifth of unregistered businesses trading close to the VAT threshold had taken action to remain below it, almost half of whom said they had closed their businesses for part of the year to avoid registering for VAT.

Angus MacDonald (Lib Dem) agreed with the idea of raising the threshold to £250,000 for all businesses, suggesting it could generate economic benefits, including new apprenticeships. He added that it would be a ‘win’ for HMRC as it would raise income tax and national insurance from newly-hired and well-paid staff and reduce reliance on the cash economy.

Lib Dem Treasury spokesperson Daisy Cooper said the party would welcome a review of VAT and asked about the steps being taken by HMRC to provide additional support for small businesses, saying they “often struggle to get the advice they need”. Cooper also urged the government to simplify the VAT registration process.

Shadow Financial Secretary, Gareth Davies, praised the previous Conservative government for its support for business. He claimed that only 14% of companies with fewer than 10 employees had confidence in the current government’s growth plans and wanted an update on its plans for a new business growth service, which the government has promised would be a “one-stop shop” for advice and support.

Exchequer Secretary James Murray said a small minority of businesses (around 0.5%) stayed below the £90,000 VAT threshold to avoid registration. He acknowledged business calls for a taper mechanism but said there was little evidence that it would tackle the ‘bunching’ of businesses just below the threshold and that it would add unnecessary complexity to the tax system.

Murray said the UK’s VAT threshold was the highest in Europe and the joint highest in the OECD, keeping most small businesses outside  VAT. He said that views on the threshold were ‘divided’—some want it higher to reduce admin burdens, others argue for a lower threshold to create fairer competition, especially in sectors like hair and beauty.

Murray said there were no plans to review the threshold and argued that “the best support that we can provide to small businesses is economic growth”.

He concluded by saying that the existing threshold “strikes a balance between keeping the majority of businesses out of VAT altogether while ensuring that we can support public services and maintain fiscal responsibility.”

You can read the full debate here.