Chancellor Rachel Reeves is weighing an increase in the VAT registration threshold as part of her autumn Budget, in an effort to spur business growth and offset a looming £20bn gap in the public finances.
Reeves will return to Parliament next week warning that the economy is “stuck” and placing productivity at the centre of her second Budget. Treasury officials fear that a downgrade in growth forecasts by the Office for Budget Responsibility (OBR) could open an even bigger hole in the books.
VAT under review
The current VAT threshold of £90,000 exempts small businesses from charging VAT, but once breached, every transaction becomes taxable. Critics argue this creates a “cliff edge” that discourages firms from expanding, with some deliberately limiting turnover to avoid a sudden five-figure bill.
Whitehall sources confirmed the idea of raising the threshold was discussed before the summer recess as a potential “growth measure.” One option being studied would be to smooth the tax burden to avoid sharp jumps once firms cross the line.
The Federation of Small Businesses (FSB) has urged Reeves to lift the limit to £100,000, claiming it would free thousands of companies from “the single most painful tax to administer.” FSB policy chief Craig Beaumont said VAT paperwork currently swallows around 45 hours of work a year for many small firms.
Divisions inside government
Any move to raise the threshold could spark resistance. Torsten Bell, pensions minister and former head of the Resolution Foundation, has argued the opposite case — calling for a sharp cut to £30,000. The Tony Blair Institute has gone further, suggesting the threshold should be abolished entirely, although economists warn this could stoke inflation while the Bank of England continues its fight to tame prices.
Dan York-Smith, a long-serving Treasury official now advising Prime Minister Sir Keir Starmer in No 10, is also seen as a strong advocate of reducing reliefs.
Wider tax changes
Alongside VAT, Reeves is also exploring ways to raise revenue from homeowners, landlords and working people, with insiders warning of a “stealth raid” on household finances.
Despite the difficult backdrop, Treasury officials insist the priority is growth. “The best way to strengthen public finances is by growing the economy – which is our focus,” a spokesperson said, citing planning reform as another lever for boosting output without heavier taxes.
