Small Businesses: VAT Threshold

Question

Asked by

To ask His Majesty’s Government what assessment they have made of HMRC data showing that an increasing number of small businesses in the UK are earning below the VAT tax threshold.

My Lords, the data referred to does not show that an increasing number of small businesses in the UK are earning below the VAT threshold. It shows only the number of voluntarily VAT-registered businesses below the VAT registration threshold of £90,000 and does not include unregistered businesses. Of the 5.8 million businesses in the UK, 2.3 million are registered for VAT and 3.5 million are unregistered.

I thank the Minister for his reply, but we have double trouble. First, an increasing number of registered small businesses are earning less than the VAT threshold of £90,000. Secondly, there has been a big drop in those earning £90,000 to £150,000—in fact, there was a decline of 26,000 businesses in the year 2025. Is that because some are deliberately suppressing their growth to avoid the additional tax and admin burden of complying with VAT, or is it because higher employment costs and taxation have choked off their incentive to grow? Either way, it is surely time to reset this threshold.

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.

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.

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.

Is the Minister aware that, according to official statistics, 99.18% of all British businesses are defined as “small”—those with 50 employees or fewer. It sometimes seems, in the answers we get, that the Government have not quite understood that.

I fully understand that, and I am grateful to the noble Lord for reminding me of it. Last year, the Government published their plan for small and medium-sized businesses, setting out support for smaller firms. We are partnering with industry to unlock productivity growth through the adoption of digital technologies. We are legislating to tackle late payments, which cost the UK economy £11 billion a year. We have launched a new Business Growth Service to make it easier to access advice and support. We are making SMEs a national priority in our new procurement policy system. We are expanding the UK Export Finance capacity by £20 billion and creating a small export builder insurance product. I assure the noble Lord that we are very aware of the points he raises.

My Lords, are the Government concerned about what seems to be the growth of cash-only businesses? They are not there for the customers’ benefit but, in some cases, for the business to avoid tax and other things.

Yes, absolutely, the Government are very aware of the points that my noble friend raises. HMRC has recently engaged in increased enforcement activity around those exact points.

The Minister will be aware of the successful campaign that Retailers Against VAT Abuse Schemes and I ran to ensure that online marketplaces are required to collect VAT on certain transactions involving non-UK established sellers. The problem is that the current system has been exploited by proxy directors, proxy companies and artificial fragmentation. The chairman of the British Independent Retailers Association has written to the Exchequer Secretary to the Treasury to ask for urgent consultation on this issue, which is probably costing HM Treasury £700 million a year. Can the Minister use his influence in HM Treasury to ensure that urgent consultation takes place immediately with the retailers who signed that letter?

Yes, I am grateful to the noble Lord for his campaigning work and raising this with me on a number of occasions. He knows that we are reviewing the online marketplace rules established under the previous Government. As part of that review, those consultations will take place. I will bring it to the attention of my colleague, the Exchequer Secretary to the Treasury, to make sure that he consults with the businesses that the noble Lord mentioned.

My Lords, for many small businesses, the VAT threshold is only one part of a much wider cumulative burden, which includes rising national insurance contributions, business rates and minimum wage pressures, and the increasing complexity of employment regulation. That all hits enterprise and dampens the ambition and animal spirits that we need to get this country growing. Does the Minister therefore see a case for lifting this and other thresholds, and for exempting SMEs from some of the ever-growing burden of regulations that we are seeing? If so, where would he start?

In a previous answer, I discussed the issues surrounding changing the threshold. The noble Baroness may know that the Windsor Framework imposes an upper limit of just over £90,000 on the threshold in Northern Ireland. The Windsor Framework is relevant by extension to the Government’s decisions in Great Britain too, so there are limitations to what we can do. She talked about the other decisions that the Government have taken, which she has consistently opposed—for example, raising the minimum wage. However, it is only because of these decisions that the Chancellor was able to tell Parliament, the day before yesterday, that living standards are now rising, having fallen under the previous Government, and that by the next election people will be £1,000 a year better off.

My Lords, small businesses are the key driver for creating jobs and employment. Can the Minister confirm that unemployment is now 5.6%—higher than during the Covid pandemic—while youth unemployment is 15.9%? What is going wrong? The Minister spent 18 months blaming the £22 billion black hole and everyone from Liz Truss to Boris—he even blamed the Tories for repealing the corn laws. When will he take responsibility for what is going wrong?