VAT thresholds: higher or lower?

Greg McNally, Founder and managing partner, VITA. Croner-i

Greg McNally, managing partner at VITA, puts the case for a radical approach to the VAT threshold to allow HMRC to focus on large company compliance and leave small businesses alone.

The government faces a difficult fiscal balancing act at the Budget. With pressure mounting to plug the public finances, policymakers are weighing two familiar doors: stimulate growth or increase taxes. VAT, and specifically the VAT registration threshold, has become a focal point of this debate. 

At present, the UK’s threshold stands at £90,000, the joint highest in the OECD and more than double the EU average. This creates both opportunities and challenges, and recent discussion has raised the possibility of moving the threshold significantly in either direction.

The case for raising the threshold

Raising the VAT threshold would take many small companies out of the system altogether. When the limit was last raised by £5,000, around 28,000 businesses were relieved of VAT obligations. If it were raised to £150,000, estimates suggest 300,000 could deregister; at £300,000, that figure could reach 640,000. 

For business owners, particularly in retail and consumer-facing sectors, this would remove both a financial burden and a growing administrative strain. VAT compliance is expensive: HMRC estimates the annual cost to businesses at £5.4bn, though in my experience the true figure is likely far higher. Smaller traders often struggle most, making them easy targets for enforcement. 

The reality, however, is that raising the threshold would bring complications too. Under the Windsor Framework, the UK remains tied to EU VAT rules in Northern Ireland, where the maximum threshold permitted is €100,000 (£88,000). Any divergence between Great Britain and Northern Ireland would require renegotiation with the EU – no small task. 

The case for lowering the threshold

Supporters of a lower threshold argue that the current system creates distortions. Many companies deliberately limit their turnover to stay below £90,000, the so-called ‘cliff edge’. Research supports this: 

• Office for Budget Responsibility (OBR) estimates £350m of lost revenue in 2023 from businesses suppressing trade.

• HMRC found 20% of companies near the threshold actively take steps to avoid growth, with nearly half closing for part of the year.

• IMF analysis shows growth slows as companies approach the threshold.

  
  

Lowering the threshold, potentially to £30,000, could encourage companies to push through the barrier, scale up, and compete more fairly with larger rivals. Critics of the current system also highlight that smaller businesses enjoy a 20% price advantage and lighter compliance requirements, creating an uneven playing field.

Wider reform required

While the growth case for lowering the threshold is compelling on paper, in practice it would be damaging without wider reform. VAT is already an overly complex system, demanding daily transactional compliance that overwhelms many small businesses.  

Outsourcing VAT administration is costly, and missteps are common, not because of negligence, but because the system itself is riddled with patches and exceptions. 

Until there is a meaningful simplification of VAT, something the now-abolished Office of Tax Simplification once advocated, I believe reducing the threshold would be a mistake. It risks driving many self-employed people and small firms into financial distress or even into the shadow economy.

For that reason, my preference is clear: raise the threshold, ideally to £250,000, or at the very least maintain it at its current level. This would provide relief for smaller businesses, reduce unnecessary compliance burdens, and allow HMRC to focus on the larger businesses that already contribute the bulk of VAT receipts. 

The debate over VAT thresholds is ultimately a debate about fairness, growth, and complexity. Lowering the threshold could incentivise expansion and close loopholes, but without simplification it risks causing widespread harm. Raising it would ease pressure on small businesses but faces political and legal obstacles. 

Whichever door the government chooses, the real prize lies in modernising the VAT system itself, bringing clarity, fairness, and sustainability to a tax that underpins much of the UK’s fiscal framework.

About the author

Greg McNally, founder and managing partner of VITA, VAT and indirect tax advisors