VAT reform has long been on the cards – Is now the time to take action?

It is no secret that the Chancellor is currently rummaging down the back of every sofa cushion in the country looking for every bit of spare change to plug the economic black hole ahead of the Autumn Budget.

Given that the way the UK handles VAT is notoriously complex and inefficient, many are starting to suspect that reform is inevitable, as changing thresholds could significantly alter the revenue raised.

However, it is unclear how VAT changes can be managed without burdening smaller businesses with administrative challenges.

We want to examine the options and assess how they may impact the economy.

Why does VAT need to be reformed?

At present, the UK has the joint highest VAT threshold in the Organisation for Economic Co-operation and Development (OECD), as it stands at £90,000.

This follows the slight increase in 2024 from £85,000, which is the threshold that had existed since April 2017.

The threshold means that only businesses that have a revenue above £90,000 need to handle VAT, with any businesses below that not having to engage with it.

When the threshold changed in 2024, around 28,000 businesses were liberated from VAT responsibilities.

Now there is a question as to whether the threshold should be lowered to bring it more in line with other countries or raised to give more businesses greater freedom from administrative tasks.

Should the threshold be lowered?

VAT was cited as the third biggest tax in terms of revenue raised in the 2024-2025 year, amassing around £171 billion.

It therefore stands to reason that a lowering of the threshold would enable a greater amount of revenue to be collected by HMRC and potentially lessen the need for other tax hikes elsewhere.

This would mean that smaller businesses would find themselves needing to keep pace with compliance measures that they may not have had to deal with previously if they have always been below the threshold.

To avoid overwhelming smaller businesses, it could be possible to create a staggered lowering of the thresholds in much the same way that Making Tax Digital (MTD) for Income Tax is being managed.

This would allow businesses time to prepare and refine their systems to adapt to the additional requirements they would be faced with.

If the threshold lowers, it will be vital for businesses to seek expert guidance and support to ensure that they stay compliant with any new responsibilities.

Should the threshold be raised?

While it might seem odd to consider raising the threshold given the current state of the economy, there is concern that a lower threshold stifles business growth.

Companies can grow fearful as the threshold approaches and may actively avoid generating enough revenue to cross it.

In fact, the Office for Budget Responsibility (OBR) estimated £350 million of lost revenue in 2023 from businesses suppressing trade to avoid the VAT threshold.

This is not good for the economy, as suppressing growth can have wider ramifications on how businesses operate and the other ways they can contribute to the economy.

It is believed that raising the threshold will allow businesses that are cautious of managing the responsibility additional space to breathe so that they can continue to grow.

However, it may be better to streamline the reporting of VAT to make it less daunting for smaller businesses, given how much revenue can be generated from collecting VAT.

Which change is most likely to happen?

At present, it is unclear as there are economic benefits to both options.

It is also entirely possible that the VAT threshold will remain static or be frozen, at which point fiscal drag will do much of the work in pulling new businesses into scope for VAT even if they try to resist.

Whatever happens with VAT, and more broadly in the Autumn Budget, our expert team are on hand to support you with efficient structuring and compliance management so that you can keep growing.

We would not recommend holding your business back for fear of crossing the VAT threshold and we can help you acclimatise to any new requirements your business faces.

Prepare for potential VAT changes by speaking to our team today!