Small Businesses: VAT Threshold

Lord Fox Excerpts

Thursday 5th March 2026 Lords Chamber

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his question. It is neither of the things that he set out. As I have said, the data cited by the noble Lord relates only to VAT-registered businesses and does not include unregistered businesses, so I do not think it shows what the noble Lord claims that it shows. If a business is already registered for VAT, it has no incentive to suppress turnover to avoid VAT, because it is already charging VAT and would need to continue to do so even below the threshold. Why would they do what the noble Lord suggested? That would not make any sense. If he looks at a longer time series of this data, he will clearly see that it moves around significantly, so the conclusions he is trying to draw are very difficult to sustain.

[Lord Fox (LD)]

My Lords, if the Minister could open his mind beyond the data of the Question, there is no shortage of studies from very reputable organisations—the IMF, the OECD and others—that there is significant bunching around a threshold, and that is not a surprise. Where they do not agree is whether the brake on growth would be improved by raising or lowering the threshold. Can the Minister tell your Lordships’ House that the Treasury will not succumb to a Goldilocks effect and conclude that, because some say it should be higher and others say it should be lower, it is happy to leave it where it is? Can he assure us that sensitivity studies are being run to look at where the threshold should be? Getting it right will open up more growth.

[Lord Livermore (Lab)]

I am very happy to open my mind in response to the noble Lord’s question. The existence of bunching around the VAT threshold is well established and has been analysed by the Office for Budget Responsibility. The OBR has explained that, where a registration threshold exists, some firms will cluster just below it to avoid the administrative and pricing consequences of entering the VAT system. That is an inevitable consequence and recognised feature of a threshold-based tax system. He will know that decisions on tax and thresholds are taken only at fiscal events. Raising the threshold further would reduce burdens for some firms, but it would also carry significant fiscal cost. The UK threshold is already high by international standards. The UK threshold of £90,000 compares to an average in OECD economies of £30,000. It could be argued, as I think the noble Lord is doing, that lowering the threshold could support growth by reducing the distortions created by the cliff edge of the threshold, but the Government are also mindful of the impact this could have on small businesses.