VAT Registration Threshold: SMEs

Mike Martin Excerpts

Tuesday 24th June 2025 Westminster Hall

[Jim Shannon (Strangford) (DUP)]

It is a real pleasure to serve under your chairship, Mr Vickers. I thank the hon. Member for Mid Leicestershire (Mr Bedford) for setting the scene and giving us all an opportunity to engage with the Minister on this issue, as the hon. Member for Keighley and Ilkley (Robbie Moore) just did. The Minister is always a very pleasant gentleman—we all know that—and he always seems to be incredibly calm. I am not sure how he does it; maybe all the worries are somebody else’s worries—I do not know what they are. But I do wish him well with his answers to the questions that we pose today.

I read a very interesting article that outlined the pros and cons of raising the VAT threshold above the £90,000 that we are sitting at. What was most notable was the fact that these arguments were all made around an unalterable fact: we in Northern Ireland are hampered from truly having a full discussion by the Windsor framework, which does not allow Northern Ireland VAT to rise above the £90,000 threshold. Even if this debate today could make a change, and even if the Minister agreed with the change, it could not happen. Why? Because of the Windsor framework. I look to my right-hand side: maybe one of the Conservative Members there might have been in the previous Government who left us in Northern Ireland in that limbo land. They can answer for themselves—it is not for me to answer for them—but I do make the point that we were let down badly by the Conservatives in relation to this.

The reality is that, unless we can have regional VAT rates, the UK is prevented from acting in our best interests economically by the EU. It is a fact of life for us, unfortunately, nine years after the vote. I voted—and my hon. Friend the Member for East Londonderry (Mr Campbell) beside me voted—to leave under the same terms as the rest of the United Kingdom; but the EU is still dictating our economic policy in Northern Ireland. That is the reason that the DUP has consistently stood against this European interference. Perhaps, now that some businesses in other Members’ constituencies are being affected, in different regions—

[Mike Martin (Tunbridge Wells) (LD)]

I thank the hon. Gentleman for giving way, but does he not now regret his vote to leave, seeing as it created all of these problems for his constituents?

[Jim Shannon]

No. I thank the hon. Member—he is a friend—but look, honestly, I am a Brexiteer; it is no secret. I want the same Brexit as the rest of the United Kingdom got. I did not get that. We were let down by a Government who did us over, so we did not get what we wanted, but if I had got the same as everybody else in England, Scotland and Wales—and my hon. Friend had—then I would not be having this conversation, and I would not be doing this spiel. I am still a Brexiteer and always will be a Brexiteer, and incidentally, the majority of people in my constituency voted to have the same Brexit as the rest of the United Kingdom, and my constituents did not get it either. When the Minister thinks about today’s debate, if he does not mind me saying, I would ask that he would petition the Cabinet, if it is not too much to ask for, to withdraw from this inherently flawed agreement for us in Northern Ireland.

The article that I read discussed the benefit of raising the threshold, highlighting that Government should want to encourage small businesses to grow. It would be much more effective to raise the threshold to £250,000, I would have thought. It is probably a better figure to work with. That is, of course, supported by the Government’s own statistics, which showed that, in 2022-23, £117 billion —75% of the total net VAT collected in the UK—was paid by traders with an annual turnover of more than £10 million. So, what does that mean exactly? Raising the threshold to £250,000 may not, therefore, have a significant impact on VAT’s total receipts, but it would allow His Majesty’s Revenue and Customs to save costs and to focus its time on ensuring that the largest VAT payers paid the right amount of tax.

The Government have a big, difficult task before them; they have got to balance the books—whatever the figure might be for the black hole, or whatever it may have been. They have set themselves that target to balance those books, and I understand that. Maybe there is another way of saving money, perhaps within HMRC, that could be better. The Minister is a very wise man; he will understand the point I am making, and the civil servants, who are the brains of the Department—I hope the Minister does not mind me saying that—will be able to respond, and maybe pass the message on about whether that can be done.

Raising the threshold would allow a large number of traders in my area, and others, to focus on growth and not question whether they could grow a business enough to cover the additional accountancy costs when VAT is involved. When most businesses register for VAT, they are faced with a choice: either increase their prices by up to 20% or lose 20% of their existing prices as VAT. That is a difficult scenario for a business. The former makes the business less competitive and likely to see a drop in sales, and the latter eats into the profits and ultimately reduces the amount of money the business can use to expand. Neither option advocates for small business growth. As I have said, this is a moot point, as the EU will not allow us in Northern Ireland even to consider raising the threshold. I cannot tell businesses in Strangford or across Northern Ireland that it could be an option.

Some argue that there are benefits to retaining the VAT thresholds. Research undertaken for HMRC in 2016 found that 20% of unregistered businesses that were trading close to the VAT threshold had taken action to remain below it. Of those businesses, almost half said they had closed their businesses for part of the year to avoid having to register for VAT. One in five said they had turned down work, which was an indication that they could not grow as they wanted to because of the restriction. That strongly suggests that a significant number of businesses actively manage their turnover in order to stay below the VAT registration threshold. Lowering the threshold would prevent businesses from suppressing their trade in that way, which would in turn encourage economic growth.

--- Later in debate ---

[Gareth Davies]

I think the hon. Gentleman is accusing you, Mr Vickers, rather than me. I simply say to him that increasing the threshold made a big difference to the 28,000 businesses that were taken out of registration. I encourage him to speak to businesses in his constituency that benefited from what is essentially a tax cut, in addition to all the other measures that I mentioned that we introduced.

The contrast between what the Conservatives did in office and the approach of the Labour Government in their first year is quite stark, and the consequences are even starker. Insolvency rates are at a 15-year high, new registrations have fallen at the fastest rate since the financial crisis, payroll employment is falling, and inflation is well above target and will be higher for longer. It is no wonder that only 14% of companies with fewer than 10 employees have confidence in the Chancellor’s growth plans. According to one survey, just 29% of UK small businesses are now predicting growth this year. Meanwhile, the Federation of Small Businesses reported that its members now view the tax burden as their second biggest barrier to growth.

Here we see very clearly the vicious cycle that Labour has fallen into, just as it did in the 1970s: higher taxes and higher inflation, leading to lower growth and lower revenues, leading to still higher taxation. That is why, even though the Chancellor promised British businesses that she would not be back for more, she is now refusing to rule out even more taxes and tax rises in the autumn Budget. That is no wonder, because the National Institute of Economic and Social Research forecasts a £60 billion shortfall in the public finances—and that was before we had Labour MPs in open revolt about the slightly tiny welfare reforms and an unfunded commitment to increase defence spending by £40 billion.

In that worrying context, I hope the Minister can stand up and provide some certainty to SMEs by giving his assurance that the next Budget will not see a reduction in the registration threshold, or indeed an increase in the rate of VAT. I would like him to stand up and rule those out right now, for all of us to hear. I know that these assurances will fall short of the increase in the registration threshold that my hon. Friend the Member for Mid Leicestershire and other Members are looking for today, but it will provide more certainty if the Minister rules those things out.

I would also be grateful for an update on the so-called new business growth service, which the Government promised would be a “one-stop shop” for advice and support. That was supposed to launch in the first half of this year, but the Government’s industrial strategy has apparently now had to push that back to later this summer. Perhaps one reason for the delay is that the best advice a business growth service could possibly give anybody is “Do not vote Labour”. That is clear for us all to see.

SMEs probably have quite a lot of advice of their own for the Government, but unfortunately the going rate for speaking to a Labour Minister is apparently £55,000, and one has to endure the inevitable gloom of the Labour party conference. In the spirit of this debate, perhaps the Minister could confirm whether the price tag for meeting him is before or after VAT. Either way, like most Labour policies, I expect it will bring in less revenue than was first hoped.

[Mike Martin]

What is the going rate for meeting with a shadow Minister?

[Gareth Davies]

I am delighted that the Liberal Democrats are keen to meet us and are willing to pay for it. Perhaps we can speak afterwards, but his constituents can speak to me any time. We are always available, across the country.

This has been an excellent debate, with many views. It has highlighted the great importance of business to all our constituents, and I mean that seriously. The comments from colleagues on my side have illuminated the many different businesses that we have, whether it is Bloom Weddings, Chris and Annie’s business in the constituency of my hon. Friend the Member for Mid Leicestershire; the fish and chip shops Old Time Fisheries and Kirkgate Fisheries in Keighley and Ilkley, which no doubt provide fantastic fish and chips but are unfortunately reducing their hours, as my hon. Friend the Member for Keighley and Ilkley pointed out; or Carmela’s in the great constituency of my hon. Friend the Member for Broxbourne. All are having a hard time of it, but they remain excellent businesses. Some are, no doubt, places where we can all eat out.

The Liberal Democrats have made some important points. The hon. Member for Inverness, Skye and West Ross-shire (Mr MacDonald) spoke about plumbers, and the hon. Member for Mid Dunbartonshire (Susan Murray) about the hair and beauty salons and high streets in Mid Dunbartonshire.

This is an important debate to have. I am reminded of the last election when one party had a key policy in their manifesto around VAT thresholds, and that was Reform. However, I am afraid that when it comes to the hard graft of making the case in this place, the party is, yet again, nowhere to be seen.

I hope we can all agree that our country is stronger because of the men and women who get up every morning, go to work and drive our economy forward, as the hon. Member for St Albans (Daisy Cooper) said. At the heart of every successful economy is the simple fact that prosperity begins small. It begins with the family-run café on the high street, the corner shop, the book shop and the local butchers, and the single parent who is just launching their dream from their spare room or their garage. These are not just businesses. These are stories of people who had an idea, stuck it out and made it happen. When we pile on more and more burdens, when taxes climb too high and regulation tangles dreams in red tape, we do not just make it harder to do business; the hope of what might be possible completely dims. A free society depends on free enterprise. When we get out of the way and support small businesses, we are not just fuelling the economy but lifting communities. My hon. Friend the Member for Mid Leicestershire believes that lifting the VAT threshold will help achieve that, and I look forward to the Minister’s response.

[The Exchequer Secretary to the Treasury (James Murray)]

It is a pleasure to speak with you as Chair, Mr Vickers. I congratulate the hon. Member for Mid Leicestershire for securing this debate. I feel that I am letting the side down by not having a quote from Napoleon to open my remarks, but I listened carefully to the hon. Member’s contribution to the debate, and to the contributions of all hon. Members, including the shadow Minister—the hon. Member for Grantham and Bourne (Gareth Davies) —and the Liberal Democrat spokesperson, the hon. Member for St Albans (Daisy Cooper). I hope that my remarks will address most of the points that they raised.

It is clear from all hon. Members’ contributions to this debate that, across the House, we agree on how valuable small businesses and entrepreneurs are to the local economies and communities in the areas we represent. As a Government, we recognise that contribution. Before I turn to the VAT threshold, the focus of this debate, I will briefly set out the wider support that the Government are providing to the small businesses that are so important in our constituencies across the country. That support includes measures set out only yesterday in the industrial strategy. A new business growth service will streamline small businesses’ access to Government support, advice and funding, providing the access that the Liberal Democrat spokesperson asked about. Reforms to public procurement will help small businesses to secure Government contracts. We will help small businesses to adopt new technologies. We will continue to tackle the challenge of late payments to SMEs. The Government are also planning to publish an SME strategy later this year, giving more detail on the Government’s wider offer for small businesses.

Hon. Members will also be aware that the Chancellor recently announced the 2025 spending review, which contained measures to support small businesses. In particular, the Chancellor increased the financial capacity of the British Business Bank to £25.6 billion, which will enable a two-thirds increase in support for small businesses across the UK. That support in the spending review sits alongside the Government’s support for small businesses through the tax system. We have more than doubled the employment allowance to £10,500 and expanded it to all eligible employers. We have frozen the small business rates multiplier to protect small properties from inflationary bill increases to business rates. We are introducing permanently lower business rates for smaller retail hospitality and leisure businesses from 2026, and we have committed in the corporate tax road map to maintaining the small profits rate and marginal relief at their current rates and thresholds, as well as maintaining the £1 million annual investment allowance.

I will now turn to the VAT threshold, which is the focus of this debate. As several hon. Members have said, a number of businesses have raised concerns about that threshold. In particular, they are concerned that the cliff edge of the £90,000 threshold, as it is, may disincentivise businesses that are close to the threshold from growing and surpassing it, and they have connected concerns about the level at which the threshold is set.

Let me first address the argument that the threshold disincentivises small businesses from growth as they approach it. I acknowledge that some businesses will take legitimate action to avoid reaching the VAT threshold, and will bunch just below that threshold. However, those businesses are a minority, accounting for around 0.5% of all businesses that are not VAT-registered. Some businesses, and indeed some hon. Members in this debate, have suggested that the Government should introduce a taper mechanism, in which the amount of VAT that businesses must charge is phased in. However, there is little evidence to suggest that a taper would tackle the bunching of businesses just below the threshold, although it would add additional complexity to the tax system. At £90,000, the UK has a higher VAT registration threshold than any EU member, and the joint highest in the OECD. That threshold keeps most UK businesses out of VAT altogether.

[Mike Martin]

I am sure that the Minister is aware that the UK is one of only three countries in Europe that does not offer a lower rate of VAT for hospitality and tourism. For example, France, Italy and Spain charge only 10% on those sectors. Will he consider lowering the rate for those sectors as part of the UK’s VAT regime to give our high streets the boost they need?

[James Murray]

I will turn to the questions that the hon. Gentleman and other hon. Members have raised about VAT reliefs in a moment, but I will first finish the point about where the VAT registration threshold is set, because that is an important part of the debate.

It is worth reflecting on the fact that views on the threshold are divided. The case for change has been regularly reviewed over the years, because some businesses argue that a higher threshold would reduce their administrative and financial burdens. However, other businesses contend that a lower threshold would provide a fairer competitive environment, for instance in the hair and beauty sector.

The Government’s approach to the VAT threshold and applicable rates aims to balance the potential impacts on small businesses, including their growth and financial sustainability, with the economy as a whole and, of course tax, revenues. Although the Government always welcome hearing businesses’ views about how the tax system operates, we are not currently planning to change the design of the VAT threshold.

More broadly on VAT, the Government often receive calls from businesses, and indeed from hon. Members, to examine the rate of VAT for specific industries. VAT is a broad-based tax on consumption and the 20% standard rate applies to most goods and services. VAT is the UK’s third largest tax and is forecast to raise £180 billion in 2025-26. Of course, tax breaks have an impact on the public finances and they must represent value for money for the taxpayer, so exceptions to the standard rate have always been limited and balanced against affordability considerations. The assessment of any new VAT relief should consider whether the cost saving is likely to be passed on to consumers.

Fundamentally, the best support that we can provide to small businesses is economic growth. Delivering secure, strong and sustainable growth to boost prosperity and living standards across the UK is the Government’s No. 1 mission, as set out in our plan for change. That is why, when we took office, we took the necessary decisions to provide the stability that is so important for investment and growth by tackling the £22 billion hole in the public finances that we inherited from the previous Government.