As the autumn Budget approaches, the Treasury is reportedly exploring a controversial move that could affect thousands of small businesses across the UK.
Officials are considering a £2 billion “tax raid” aimed at reducing the threshold at which small firms and sole traders must register for VAT, part of a wider effort to plug a growing hole in public finances.
Economists warn the shortfall in government funds could reach as high as £50 billion.
VAT Threshold Under the Microscope
Currently, businesses do not have to register for VAT until their annual turnover hits £90,000.
However, insiders say Treasury chiefs are pushing for a dramatic cut to just £30,000, a move that would bring tens of thousands of small firms into the VAT system.
The idea has long been on the Treasury’s wishlist, and supporters argue it could boost government revenue.
Small Businesses Sound the Alarm
Business leaders are sounding the alarm over the proposals.
The Federation of Small Businesses (FSB) is lobbying to raise the threshold instead, suggesting £100,000 as a more growth-friendly figure.
Tina Mackenzie, the FSB’s policy chief, said:
“To unlock the economic growth we all know is desperately needed, the VAT threshold should be raised further to £100,000.
A higher threshold would encourage thousands of small firms to expand, increase tax revenue naturally, and create more jobs and opportunities.”
Some economists, however, caution that the current £90,000 threshold already creates perverse incentives, with some firms reportedly trying to keep turnover below the limit, even taking extended holidays to avoid VAT obligations.
Key Figures Driving the Plan
Insiders point to two Treasury figures as the driving forces behind the push: Torsten Bell, the Chancellor’s new Budget supremo, and Dan York-Smith, the Treasury’s head of tax and welfare policy.
York-Smith, soon to take on a role as Sir Keir Starmer’s private secretary following a recent No 10 reshuffle, has a track record of championing tax changes.
Past proposals he has supported include reducing the VAT threshold, levying National Insurance on pensioners, and even introducing road pricing for electric vehicles.
A Whitehall source told the Daily Mail:
“Dan is a bright guy and may prove to be a good appointment, but he does love his taxes.
With him and Torsten, you have two super-smart figures who know how the system works making the case for changes they have wanted for years.
The question is who will exercise the political judgment to prevent another winter fuel-style policy mistake that has to be reversed.”
Government Stays Tight-Lipped
The Treasury has declined to comment on the speculation ahead of the Budget, emphasizing instead the importance of economic growth as the best route to stronger public finances. A Treasury spokesperson said:
“The best way to strengthen public finances is by growing the economy – which is our focus.”
With the Budget looming, all eyes will be on Rachel Reeves and her team as they navigate the tricky balance between revenue-raising measures and support for small businesses.
