UK Reform Party: double VAT registration threshold

Labour’s VAT rate rise handcuffs push debate to threshold reduction

But Labour has pledged not to increase income tax, National Insurance, or VAT rates on working people (no, I don’t know what that means either).

So perhaps a major VAT registration threshold cut to drag thousands of enterprises into the tax net. After all, the UK has the highest VAT registration threshold in Europe. It has been estimated the threshold is already holding back over 25,000 traders which are turning down business to avoid all of their sales becoming liable to 20% VAT. The appointment of Torsten Bell MP, a backer of the threshold cut, to lead the development of November’s budget measures has added to momentum.

Whilst the UK has one of the highest VAT registration thresholds in the world, others are closing the gap with Italy and France having announced recent rises.

But Ms Reeves also needs to stimulate growth to secure revenues, especially in the dynamic small business sector. So potentially a VAT threshold rise to take more businesses out of the tax net who are suppressing their sales to avoid having to charge 20% on their entire revenues.

Registration threshold change to pro-growth £100,000 or tax-raising £30,000?

The current £90,000 was raised in 2024 for the first time in nearly 10 years.

According to The Telegraph, the Chancellor is weighing up a pro-growth move: increasing the VAT threshold from £90,000 to £100,000. The aim, insiders suggested, would be to encourage small businesses to expand without worrying about tripping the VAT line, while cutting down on paperwork and compliance burdens. Business groups like the Federation of Small Businesses have long campaigned for just such a measure, arguing that a higher threshold would unlock growth and productivity.

But then came a very different headline. The Daily Mail reported that Reeves’ Treasury team is considering a dramatic cut — dragging the VAT threshold all the way down to £30,000. That would pull tens of thousands of sole traders, freelancers and micro-firms into the VAT net for the first time, potentially raising around £2 billion in extra tax revenue. The story suggested that senior officials, including Reeves’ new budget supremo Torsten Bell, back the plan as part of a broader push to close a £50 billion hole in the public finances.

So, what’s going on? Is the government about to give small businesses breathing space, or land them with new obligations and higher costs?

Why the VAT threshold matters

The UK currently has the highest VAT registration thresholds in Europe at £90,000. That means businesses turning over less than that can avoid registering for VAT — and all the admin and pricing implications that go with it.

But that threshold creates a cliff edge. Some firms deliberately limit their turnover to stay below the line, even turning away work or taking longer breaks to avoid breaching it. Economists call this the “bunching effect,” and the Treasury has argued for years that lowering the threshold would remove the distortion and boost tax revenues. In an October 2022 working paper, the University of Oxford and others found ‘robust evidence that annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold

On the other hand, for businesses hovering just below £90,000, being forced into VAT can be painful. Suddenly their prices look 20% higher to customers, while they face new reporting requirements and cash flow challenges. For many small firms, particularly sole traders, VAT registration can feel like an anchor weighing down growth rather than a stepping stone to success.

That’s why the Federation of Small Businesses is lobbying for a higher threshold — ideally £100,000 or more. The argument: let entrepreneurs focus on expansion, job creation and investment rather than compliance.

Two stories, two directions

The Telegraph’s report framed a threshold rise as part of Reeves’ attempt to present herself as a “pro-growth” Chancellor, trying to balance the need for revenue with the imperative of kickstarting business confidence.

The Daily Mail’s report, however, highlighted the fiscal squeeze Reeves faces — and how cutting the threshold could help fill the budget “black hole.” It even named senior officials said to be pushing the idea, raising fears in small business circles that such a move is more than just idle speculation.

Both scenarios are plausible. Reeves has to deliver a budget that reassures markets she can keep borrowing under control. But she also needs to convince voters, particularly small business owners, that Labour is serious about growth and entrepreneurship.

What it means for small businesses

The real problem right now is uncertainty. With such wildly different briefings in the press, small businesses don’t know whether to expect relief or extra burdens.

• If the threshold rises to £100,000: some firms currently holding back may push ahead with expansion. It would be a modest but welcome signal that the government wants to back growth.
• If it falls to £30,000: thousands of small traders would be dragged into VAT, facing new paperwork and cash flow headaches. For many, it would feel like a tax raid rather than a growth strategy.

Until the Chancellor stands up at the despatch box this autumn, no one outside her inner circle knows which way this will go.

Watching the red book

One thing is clear: the VAT registration threshold has become one of the most politically sensitive levers in the tax system. It sits at the intersection of growth policy and revenue raising. And with Reeves under pressure on both fronts, it’s no surprise that contradictory trial balloons are being floated in the press.

For small businesses, all eyes will be on the Autumn Budget. Will Reeves opt to raise the threshold, lower it, or keep it exactly where it is? Whatever the decision, it will speak volumes about her priorities — and about how she plans to square the circle between growth and fiscal discipline.

Until then, small businesses can only wait — and brace themselves for whichever way the Chancellor jumps.