PolicyLens

Methodology note

Raise VAT threshold to £150,000: calculation note

Assumptions behind the Raise VAT threshold to £150,000 scenario. Implementation detail is incomplete, so uncertainty is explicit.

View main policy page: Raise VAT threshold to £150,000

Central fiscal result

+£3.0bn - Net fiscal impact in 2027-28

Low case: +£1.0bn. High case: +£6.0bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

  • VAT threshold rises from £90,000 to £150,000.
  • The scenario follows the 2024 Contract detail.
  • No tapered VAT entry is modelled.
  • The live page gives broad business-tax language.

Affected population

  • Affected units are firms near £90,000 to £150,000 turnover.
  • Microbusinesses and sole traders are most exposed.
  • Consumers may benefit if VAT savings pass through.
  • VAT-registered competitors may face price pressure.

Gross impact

  • Central cost is £3bn from turnover moving outside VAT.
  • Low case assumes limited eligible turnover and growth gains.
  • High case assumes stronger deregistration and bunching.
  • No precise HMRC microdata were available.

Fiscal build-up, central case

  • VAT receipts lost: +£3.2bn
  • Compliance-cost relief offset: -£0.2bn
  • Administration: +£0.0bn
  • Administration and uncertainty: +£0.0bn

Central net impact: +£3.0bn in 2027-28.

Behaviour and pass-through

  • Low case assumes firms expand enough to offset part of receipts loss.
  • Central case assumes the threshold cliff moves upward.
  • High case assumes significant bunching below £150,000.
  • Price pass-through is consumer benefit, not fiscal offset.

Phasing

  • 2026-27: +£0.4bn. Preparation or partial implementation.
  • 2027-28: +£3.0bn. Main scenario year.
  • 2028-29: +£3.2bn. Behaviour and pass-through develop.
  • 2029-30: +£3.4bn. Steady-state uncertainty persists.

Main source groups

  • Department for Business and Trade, "Business population estimates 2025" (2025): The UK had about 5.7 million private-sector businesses in 2025, mostly small firms; sets affected firm context.
  • Office for Budget Responsibility, "Economic and fiscal outlook: business rates receipts" (2026): Business rates receipts are forecast at about £34bn in 2025-26; anchors rates relief scenarios.
  • HM Treasury and HMRC, "Increase to VAT registration threshold" (2024): Used for official spending, revenue or policy-costing baselines against which the scenario is compared.
  • HM Revenue and Customs, "Direct effects of illustrative tax changes" (2026): Used to support the baseline, affected-population sizing or behavioural assumptions in the illustrative scenario.
  • Keen and Mintz, "The Optimal Threshold for a Value-Added Tax" (Journal of Public Economics, 2004): The VAT threshold trades off revenue and production efficiency against compliance and administration costs; directly relevant to raising the registration threshold.
  • Liu, Lockwood, Almunia and Tam, "VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence" (Review of Economics and Statistics, 2021): UK firms bunch around the VAT threshold, showing that the threshold distorts growth and reporting decisions; supports caution that a higher threshold can shift, not remove, distortions.
  • Reform UK, "Our Policies" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.