UK VAT threshold rises, but a ‘steep’ growth obstacle remains

At first glance, the UK government’s decision to increase its VAT registration threshold looks straightforward. A deeper look reveals that complex questions concerning post-Brexit indirect tax policy and business growth remain unanswered.  

In early March, UK Chancellor of the Exchequer Jeremy Hunt announced that his country’s VAT registration and deregistration thresholds will increase, for the first time in seven years, starting on 1 April 2024. Here’s a breakdown of the policy update, which affects small businesses that make taxable supplies as well as companies in Northern Ireland that have taxable turnover between £85,000 and £90,000 due to EU acquisitions:   

• The 12-month taxable turnover threshold increases from £85,000 to £90,000 (when annual turnover surpasses £90,000, a company must register for UK VAT).   
• The 12-month taxable turnover threshold that determines when an organisation may apply for deregistration will increase from £83,000 to £88,000.   
• In Northern Ireland, the registration and deregistration thresholds for acquisitions increase from £85,000 to £90,000.  
• Businesses may elect to voluntarily register for VAT even if their 12-month taxable turnover is below £90,000.  

In its policy paper on the change, the HM Revenue & Customs (HMRC) emphasised that the UK’s VAT registration threshold is higher than any EU Member State. It’s also tied with Switzerland for the highest threshold among Organisation for Economic Cooperation and Development (OECD) countries: “This keeps the majority of businesses out of VAT altogether. Any businesses with turnover of £90,000 or less do not have to register for VAT.” The HRMC estimated that as many as 28,000 businesses will benefit from the threshold increase.  

The problem, according to businesses and individuals who advocated a much larger UK VAT threshold increase, is that many smaller companies (as well as sole traders and partnerships) appear to intentionally remain below the annual VAT threshold (essentially restricting revenue growth) as their annual turnover approaches the VAT registration threshold.   

This growth suppression is evident when businesses are plotted on a graph according to their annual turnover level. In 2018-2019, when the VAT registration threshold was £85,000, the number of companies with annual turnover in the £84,000-£85,000 range far exceeded the number of companies with annual turnover in the £85,000-£86,000 band. On a graph, this difference is represented by a steep downward line – so sheer that that it resembles a cliff edge. “Why do we see the cliff-edge effect?”, this Tax Policy Associates article asks. “Because businesses don’t want to have to charge VAT – and have to raise prices by up to 20%. Compliance hassle is also a factor, but evidence suggests much less important than the cold hard cash cost.” Those price increases can put VAT registrants at a disadvantage to similarly sized competitors that remain just below the registration threshold.   

Here’s where the VAT registration threshold plot thickens: The Guardian reported that Hunt confided to colleagues that he could not increase the UK VAT threshold beyond £90,000 due to the Northern Ireland protocol, which lays out post-Brexit rules that govern trading among Northern Ireland, Britain and the EU (including Ireland). Interestingly, this demonstrates how the UK, despite offering one of the highest VAT registration thresholds in Europe, remains entangled with the EU VAT legislation, even post-Brexit.  

While these issues are unlikely to be resolved any time soon, companies approaching the new VAT registration threshold can reduce future compliance hassles by considering investing in a tax automation solution.  Such solutions should meet the requirements not only of the existing UK regulations but also cater to potential complexities arising from ongoing ties with EU VAT legislation, including those outlined in the UK Making Tax Digital for VAT regime.