VAT thresholds, revenues, and the role of counterfactuals
The Telegraph reported that UK Chancellor Rachel Reeves is considering raising the VAT registration threshold. The article claimed the Office for Budget Responsibility (OBR) determined that raising the threshold from £85,000 would increase government revenues by decade’s end. However, this interpretation misrepresents the actual findings.
What the government projected
The government’s March 2024 policy paper examined raising the VAT threshold from £85,000 to £90,000. According to projections, this change would:
- Reduce revenues in years 1-4 (ranging from £150-185 million in losses)
- Increase revenues by £65 million in 2028-29
The government explicitly stated: “This measure is not expected to have any significant macroeconomic impacts.”
The role of the counterfactual
The revenue increase in 2028-29 doesn’t reflect economic growth benefits. Instead, it results from how the baseline scenario works. The baseline:
- Freezes the VAT threshold at £85,000 until March 2026
- Then indexes it to Retail Price Index (RPI) inflation
By 2028-29, the inflation-indexed baseline reaches approximately £92,000, while the policy threshold remains at £90,000. This £2,000 difference generates the projected £65 million revenue gain—not from behavioral responses or growth effects.
Running the numbers
| Fiscal Year | RPI Rate | Baseline Threshold | Policy Threshold | Revenue Impact |
|---|---|---|---|---|
| 2024-25 | - | £85,000 | £90,000 | -£150m |
| 2025-26 | 3.0% | £85,000 | £90,000 | -£185m |
| 2026-27 | 2.8% | £87,550 | £90,000 | -£155m |
| 2027-28 | 2.0% | £89,860 | £90,000 | -£10m |
| 2028-29 | 2.5% | £92,107 | £90,000 | +£65m |
Key takeaway
The revenue turnaround reflects mechanical inflation indexing rather than evidence that the policy sits on the favorable side of the Laffer curve. Any growth effects from reducing administrative burdens remain unquantified in government projections.
There are legitimate arguments both for and against raising the VAT threshold—reducing compliance burdens for small businesses versus creating distortions that discourage growth. But those arguments should be made on their merits, not misrepresented projections.
Originally published on Substack.