The chancellor is reportedly looking at raising the VAT registration threshold at Autumn Budget 2025 to £100,000 to boost small business growth and reduce VAT compliance burden.
The move by Rachel Reeves would mean a contractor PSC could generate an additional £10,000 in annual turnover before needing to register for VAT and charge 20% VAT on services.
In the current 2025-26 tax year, Personal Service Companies (PSCs) and small businesses are required to register for VAT when income in a 12-month rolling period exceeds £90,000.
'Stuck UK economy' needs VAT threshold reform
But before MPs broke for summer recess on July 22nd, Reeves reportedly joined Treasury officials in mooting a comprehensive VAT system review to support business growth.
And that comprehensive review of the Value Added Tax system is understood to have had as its lead proposal the VAT threshold increase to £100k to reduce small business tax burden.
The chancellor will return to parliament today (September 1st) and warn of a "stuck" economy, requiring a "growth measure" — the £10k lift in the VAT registration ceiling, the Telegraph reported.
'Mooted VAT registration threshold increase isn't sizeable enough for small business relief'
Adam Ginns, co-founder at Layers Accountancy, is underwhelmed by the proposed VAT threshold reform for contractor businesses.
The chartered accountant says: "Sorry, but fuelling small business growth is not going to happen because they raised the VAT registration threshold from £90k to £100k.
"It would immediately reduce VAT tax receipts by around £100million from HMRC's perspective.
"And it's not a sizeable enough change that would change anything other than for contractor businesses sitting just below the current VAT threshold."
'Raising VAT threshold from £90-£100k isn't enough to make an impact on business growth'
Sumit Agarwal, boss of DNS Accountants, says the chancellor's direction is correct for small business tax relief but the dimension is disappointing for contractor tax planning.
The contractor accountancy boss told ContractorUK: "Raising the VAT threshold would be a good move for many small businesses and contractor PSCs, as it would reduce tax burden and VAT administration costs.
"But raising the VAT registration threshold from £90k to £100k isn't enough for meaningful small business growth; the impact will be small. I recommend raising it to at least £120k, to speed up business investment and the ease of doing business."
'VAT threshold bunching' affects small business growth
The Federation of Small Businesses (FSB) recommended raising the VAT registration threshold to £100,000 in 2021 to address small business growth constraints.
At the time of the FSB's recommendation, the VAT threshold was £85,000.
The FSB says HMRC evidence shows "VAT threshold bunching" occurs beneath the current VAT registration limit, whereby numerous small businesses suppress their turnover to avoid adding 20% VAT onto their sales price.
'VAT cliff-edge' stunts contractor business growth
"This…£90k VAT 'cliff-edge'…stunts growth for micro-companies and contractor businesses," said a technical sales lead for a limited company consultancy in the oil and gas sector, posting to social media last week.
"[Owner-managers say] 'I'll stop at £88k and take Feb/March off.' That means no apprentices. No 2nd mate. It also means thousands of contractor companies not growing to their potential."
In their 2021 report, the FSB said a £100k VAT ceiling should come with a "smoothing mechanism to reduce VAT threshold bunching" for small business growth.
'Sliding scale or grace period might be fairer for small business VAT compliance'
Alan Broome, managing director of Acumenica Group, is in favour of provisions to accompany any new VAT threshold, or it will remain inequitable for small business tax planning.
Of the press reports that the chancellor wants to use the still unscheduled Autumn Budget to introduce a £100k VAT threshold, accountant Mr Broome reflected:
"The thing is that a 'cliff-edge tax' like this VAT registration threshold is inherently unfair. A contractor business with £85,000 revenue has an edge against one with £92,000.
"The argument can be made for reducing the VAT threshold to a very low level so that it's a level playing field for all but the very smallest of businesses. A sliding scale, or a grace period when starting up, might be fairer for small business VAT compliance."
'VAT population' and small business statistics
Torsten Bell, the new pensions minister, has called for the VAT registration threshold to be lowered to £30,000 to increase small business VAT compliance.
Bell made the call at the Resolution Foundation, a think-tank, but he was hired last week by the government, partly to help Reeves draft Autumn Budget 2025 tax policy.
Official VAT registration figures show that the turnover band with the most traders ranges between £1 and the VAT registration threshold figure, totalling 678,350 small business traders.
Also in 2023-24, 41% of the "VAT population" declared an annual turnover up to and including the VAT registration threshold (i.e. £85k or below).
'Every UK small business under VAT compliance'
Meanwhile, according to Treasury minister James Murray MP, out of the UK's total 5.6million businesses, 1.3million are VAT-registered with turnovers above the current VAT threshold.
The minister also said on July 23rd 2025 that the number of small businesses with turnover below the VAT threshold is 4.3million.
DNS's Mr Agarwal is hopeful that the chancellor won't hit this vast swathe of small businesses in the autumn budget with increased VAT compliance burden.
"I can see some commentators recommending a £30,000 VAT registration threshold," Mr Agarwal began yesterday (Sunday Aug 31st 2025).
"That would literally bring what would feel like every UK small business under VAT compliance, imposing more admin and red tape — including for HMRC. And it'd send an absolutely negative message to Britain's small business enterprises."
'Align VAT threshold with Making Tax Digital for small business efficiency'
Jeremy Roff, a former PwC tax partner, indicates that there may be a halfway house, of sorts, between £120k and £30k for small business tax compliance.
"One option facing the chancellor is to lower the VAT registration limit to say £50,000, which would align with the Making Tax Digital (MTD) level for small business reporting.
"Then, the MTD for income tax quarterly returns could be junked because contractor businesses would be doing quarterly VAT returns anyway."
"That would mean most small businesses supplying consumers would have to raise prices," Mr Roff said. "But that is better than having to do it in isolation."
'Small businesses have held back revenue for years to duck VAT registration compliance'
The FSB says that in July 2025, for the first time in its survey's history, the chunk of small firms expecting to contract, sell or close, outnumbered the chunk hoping to grow.
Carolyn Walsh, a former inspector of taxes, isn't convinced that the chancellor's potential plan to add £10k onto the VAT ceiling has been well thought-out for small business growth.
Walsh told ContractorUK: "Many small businesses have clearly held back revenue for years to avoid the need to charge their customers an extra 20% in VAT and, in turn, avoid the need to spend time and money as a tax collector and processor.
"A £10,000 uplift to the current VAT threshold will be good news overall for small business cash flow. But it will only be for a very small number of businesses with turnovers teetering just under £90k, as it will remove the headache of limiting their work to avoid breaching the current VAT registration threshold.
"But in the current economic climate, it's not necessarily going to be that easy for small companies to immediately drum up more orders for business growth.
"It's true that some contractor businesses may have the ability to more easily take on extra work than others, to increase turnover.
"Yet they would then have to consider the additional tax costs involved in terms of PAYE, Corporation Tax, dividend tax if they're limited companies, and income tax/NI if they're self-employed."
'VAT return takes 45 hours a year of a small business owner's time'
Boss at Oblako Services Ltd, Walsh said Reeves could irritate individuals who work for themselves if the chancellor 'sells' any £10k uplift as a red tape-cutting exercise for small business administration.
"Although it's estimated that a VAT return takes 45 hours a year of a small business owner's time for VAT compliance, the self-employed trader with a turnover of half the mooted new threshold, so £50k, will be filing quarterly reports under Making Tax Digital for Income Tax next year anyway," the ex-tax officer says.
"So, any claim in the chancellor's speech on Autumn Budget day about 'Labour delivering an admin saving due to not needing to file a VAT return' will cause a collective groan from small business owners. And it will probably not make any difference to those taxpayers' business planning."
'Raising the VAT registration threshold would be a welcome move for contractor businesses, but…'
DNS Accountants says a VAT registration threshold increase could make a positive difference for contractor businesses and small business growth, but it says there's plenty more Reeves could do.
"Raising the VAT threshold would be a welcome move next quarter for small business tax relief, but fixing fundamentals like the UK's benefits bill, pensions bill, and the NHS all remain more key to tackling the budget deficit," Mr Agarwal says.
"Even investing in the right places — which mainly means supporting entrepreneurs and small business growth — is more crucial to creating positive momentum and bringing investor confidence back to the UK, which in turn will create jobs and help business growth."
'VAT threshold change at Autumn Budget not an easy sell for Reeves'
Andrew Clure, a limited company contractor, says Autumn Budget 2025 changing the VAT registration threshold is an outside bet, even an uncertainty, in contrast to more certain tax announcements that are easier for the chancellor to present.
On LinkedIn, Clure wrote: "It's practically certain that the income tax thresholds will be frozen for longer, though. Which is basically an income tax increase. Governments of all colours love fiscal drag because it's an easy 'sell.' Changing the VAT threshold is definitely not an easy sell and doesn't even raise that much tax revenue."
