Measure

VAT registration threshold

The measure

The VAT registration threshold is to increase from £85,000 to £90,000. The VAT deregistration threshold will similarly increase from £83,000 to £88,000. The government have stated that both thresholds will be frozen thereafter. 

 

Who will be affected?

Businesses, specifically those who supply goods and/or services to end consumers or other parties where VAT represents an additional cost, who are currently trading around the current VAT registration threshold. 

 

When will the measure come into effect?

The thresholds will change from 1 April 2024. 

Our view

This is perhaps a somewhat surprising measure given that the current threshold of £85,000 has been frozen since 1 April 2017, with the government’s 2022 Autumn Statement stating that it would remain frozen at £85,000 until 31 March 2026.    

The UK VAT registration threshold is comparatively high when compared with other countries – higher than any countries in the EU, and one of the highest globally. Consequently, it is arguable that this causes a stagnation of growth for businesses as they reach the VAT registration threshold, particularly those who supply goods and/or services to end consumers or other parties where VAT represents an additional cost, as being obliged to register for VAT would mean increasing prices or reducing profit. 

To address this issue, one persuasive argument is to reduce the VAT registration threshold so it is set at a level which effectively means that all businesses would be required to be VAT registered, thereby minimising any distortion that VAT may create. However, this would come at an administrative cost, both for taxpayers and the government, and would not be welcome by many smaller businesses. 

Alternatively, to mitigate the ‘cliff edge’ stagnation of growth concerns, it is arguable that a significant increase in the VAT registration threshold would mean that many smaller businesses would be able to expand to a natural size without being adversely impacted by VAT. However, such an increase would result in a reduction in the tax yield for the government and therefore may not be economically desirable. 

Therefore, whilst an increase in the VAT registration threshold of £5,000 does create a slight increase in headroom for the smaller business, the fact that the threshold would have been over £100,000 if it had been indexed to inflation in the intervening years, and that it allows for only modest growth before the obligation to register is again crystallised may suggest that this measure defers, rather than permanently addresses any perceived issues.