Reeves Negotiates to Increase VAT Threshold in Effort to Boost Economic Growth

VAT Threshold Review

• Potential Increase in VAT Threshold: Chancellor Rachel Reeves is contemplating raising the VAT registration threshold from its current level of £90,000 to stimulate economic growth. This move is part of a broader strategy to address a projected £20 billion shortfall in public finances.
• Opposition from Key Figures: The proposal faces opposition from Torsten Bell, the pensions minister, who advocates for a reduction of the threshold to £30,000, citing concerns from the Resolution Foundation. The Tony Blair Institute also supports eliminating the threshold, although this could exacerbate inflation.

Economic Context

• Current Economic Challenges: Reeves plans to address Parliament next week, emphasizing that the economy is “stuck” and prioritizing productivity in her upcoming Budget. Treasury officials are wary of a potential downgrade in growth forecasts from the Office for Budget Responsibility (OBR), which could worsen the fiscal situation.
• Administrative Burden on Businesses: The existing VAT system is criticized for creating an administrative burden that discourages businesses from exceeding the threshold, as they face significant tax liabilities once they do.

Small Business Impact

• Support for Small Businesses: The Federation of Small Businesses (FSB) has discussed raising the VAT threshold as a means to foster growth and increase tax revenue. They argue that a higher threshold, potentially up to £100,000, would allow more small businesses to operate without the burden of VAT.
• Time and Resource Drain: Managing VAT compliance is reported to consume about 45 hours annually for small businesses, which the FSB highlights as a significant drain on resources.

Government's Stance

• Focus on Economic Growth: A Treasury spokesperson reiterated that the government aims to strengthen public finances through economic growth rather than tax increases. They also mentioned planning reforms as a potential avenue for enhancing growth without imposing additional tax burdens on working individuals.