Labour could target the last of these three taxes: VAT, which stands for value added tax. VAT is a flat rate tax applied to most products and services we buy. It’s called a “regressive” tax as the poor pay the same rate as the rich.
It’s the UK’s third-largest tax, after income tax and NI. In 2023/24, receipts totalled £169.25bn. By comparison, inheritance tax, which annoys people a lot more, generated just £7.5billion.
VAT is charged at a flat rate of 20% which falls to 5% on home energy bills. New housing, children’s clothing and most foods are zero-rated.
If chancellor Rachel Reeves hiked the 20% charge or scrapped VAT exemptions, this would spark even more outrage than abolishing the winter fuel payment for 10million pensioners.
She won’t do that.
But there’s something else she could do. Small business owners will hate it.
Today, businesses only have to register for VAT if their annual turnover tops £90,000.
Former Tory chancellor Jeremy Hunt increased the VAT registration threshold from £85,000 in his March Budget saying it would “reduce the administrative and financial impact” of the tax and encourage them to invest and grow.
Now campaigners want Labour to slash the threshold to £45,000 or even £30,000 instead. Even though it would smother small businesses in red tape.
VAT-registered businesses must keep records of everything they buy and sell, send a VAT return to HMRC every three months, and pay any tax due.
It’s a lot of cost and bother for smaller business owners who are already working flat out. Many deliberately hold their annual income below the £90,000 threshold to avoid the hassle.
Many tax experts want to put a stop to that, including Labour’s new advisor Sir Edward Troup. When Hunt hiked the VAT registration threshold to £90,000 he said halving it instead “would have been a better way to remove a barrier to growth.”
Think tank The Resolution Foundation, led by the former Labour adviser Torsten Bell, agrees but wants to go even further.
It has proposed slashing the VAT registration threshold by two thirds to just £30,000 as today’s higher threshold “acts as a disincentive for small firms to grow”.
That could hit more than 500,000 businesses.
It would bring in an estimated £1billion. That could rise if Bell is correct and tens of thousands of small firms expand their turnover beyond £90,000.
Unless others limit theirs to £30,000 or simply give up, as many might.
Can Reeves do it without breaking a manifesto pledge? Maybe. Would smaller businesses thank her? I don’t think so. Will she do it anyway? We’ll find out in her autumn budget on October 30.
