The Chancellor, Rachel Reeves, risks fuelling inflation and damaging small business growth if she reduces the VAT registration threshold in the Autumn Budget, according to leading audit, tax and business advisory firm Blick Rothenberg.
The warning comes amid growing speculation that the Treasury is considering lowering the current £90,000 VAT threshold in a bid to raise revenue and bring more small businesses into the tax system.
However, Gabby Donald, a partner at Blick Rothenberg, said that such a move would be “immediately inflationary”, forcing thousands of small firms to raise prices and burdening them with complex new compliance requirements.
“Despite advocacy from some think tanks, the Chancellor must not reduce the VAT threshold in the Autumn Budget,” Donald said. “The initial impact would be inflationary as more businesses become obliged to charge 20% VAT on top of any price increases to cover their additional compliance costs.”
She added that consumer-facing sectors — including hospitality, personal services, trades, and the creative industries — would be hit hardest.
Donald said the argument that lowering the VAT threshold would drive economic growth was “far from clear-cut”.
“A sudden, material reduction in the current £90,000 VAT threshold would bring large numbers of small businesses into the scope of quite a complicated tax,” she said. “The impact of higher prices on consumer spending is likely to hit business profitability and, in turn, investment and employment.”
Lowering the threshold could also have the opposite effect on productivity, Donald warned, as smaller firms already operating on tight margins would struggle with new administrative costs and the need to manage cashflow around VAT payments.
“Reducing the threshold is unlikely to yield a significant increase in the tax take for the Government,” she said.
According to HMRC’s latest VAT statistics, more than 77% of the total VAT revenue of £168 billion in 2023–24 came from large businesses with annual turnovers above £10 million. By contrast, companies with turnovers below £150,000 contributed only about £3.9 billion in total.
“If the threshold was reduced materially, greater demands would be placed upon HMRC, but very little would be gained fiscally,” Donald said.
Blick Rothenberg said comparisons with other economies — often cited by advocates of VAT reform — were misleading.
“Many of the think tanks and academics that favour bringing the threshold down significantly or removing it altogether often talk about the benefits seen in smaller countries like New Zealand,” Donald said.
“But the UK economy and VAT system differ significantly from New Zealand, which operates a much less complex Goods and Services Tax (GST) system, and has far fewer registered businesses.”
New Zealand, with a population of just 5.3 million, has a small business ecosystem that is vastly different from the UK’s, where 2.7 million companies are VAT-registered and would face widespread administrative disruption if the policy were implemented.
While some economists have argued that the high VAT threshold disincentivises business expansion — with small firms deliberately capping turnover to avoid registration — Blick Rothenberg said the evidence for cutting the threshold in a large, diverse economy like the UK was weak.
“While there is some evidence that the current threshold inhibits growth, the case for a drastic reduction in a large economy like the UK’s is far from proven,” Donald said. “To implement this type of change quickly would be an extremely bold experiment.”
The comments come as the Chancellor faces pressure to find new revenue sources without breaching Labour’s self-imposed fiscal rules ahead of the Autumn Budget.
Analysts said a cut to the VAT threshold might appeal politically by appearing to target tax avoidance among microbusinesses — but warned it would almost certainly backfire by raising prices, increasing red tape, and hitting consumer demand.
Donald concluded: “Lowering the VAT threshold may sound like a simple fix, but it risks being an own goal for the Treasury. The short-term revenue boost would be outweighed by inflationary pressure, lower consumer spending, and reduced investment from small businesses that form the backbone of the UK economy.”
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Cutting the VAT threshold would fuel inflation, warns Blick Rothenberg
