Here’s a deep dive into the speculation that the UK Government may reduce the VAT registration threshold so that it is more aligned with the thresholds being used for Making Tax Digital (MTD). We’ll cover what’s being proposed, what the drivers are, potential impacts, who gains/loses, and whether the rumours are realistic.

What is the VAT registration threshold & what is MTD?

To set the stage:

– VAT registration threshold: currently, in the UK businesses must register for VAT if their taxable turnover in a rolling 12-month period exceeds £85,000. Once registered, they must charge VAT, keep proper VAT records, file VAT returns, etc.

– Making Tax Digital (MTD): HMRC’s programme to require digital record-keeping and digital or online submission of tax data. It initially applied to VAT-registered businesses (above the VAT threshold), and now extends to income tax (for self-employed and landlords) with reducing qualifying income thresholds over time.

Specifically, MTD for Income Tax Self Assessment (ITSA) is being gradually lowered:

– From 6 April 2026, sole traders/landlords with qualifying income over £50,000 (2024–25 year) must comply.

– From 6 April 2027, this threshold drops to £30,000 qualifying income.

– From 6 April 2028, the threshold will further reduce to £20,000.

So there is a mismatch: the VAT registration threshold is much higher than the lowest income thresholds for MTD ITSA.

What’s being speculated

Some commentators, business-tax agents, and media reports suggest that the Government may consider reducing the VAT registration threshold, possibly to bring it more in line with MTD thresholds (e.g. somewhere between £30,000–£50,000) or otherwise adjust the threshold downward.

Alternatively, there is speculation of raising it; or of introducing more flexibility or tiers. But the idea of lowering it has been floated especially in connection with the further lowering of thresholds for MTD, to reduce administrative complexity/unfairness between businesses.

For example:

– ContractorUK reports that there are rumours the threshold might be raised to £100,000 to ease compliance.

– Other voices, like Torsten Bell (Pensions Minister) via Resolution Foundation, have suggested lowering the VAT threshold (to maybe £30,000) so more businesses are included in VAT compliance.

So there is no consensus or government confirmation, but there is pressure from various stakeholders to align thresholds, adjust for fairness, reduce “cliff edges”, or reduce complexity/cost of compliance.

Why might they want to reduce the VAT threshold to align with MTD?

Here are the main reasons driving the speculation:

– Fairness & consistency
If smaller businesses are being required to use MTD for Income Tax with thresholds dropping to £20,000–£30,000, it may be seen as unfair if VAT compliance remains out of reach until much higher turnover. Many feel there is an inconsistency between being forced into digital reporting for some taxes but avoiding VAT obligations due to threshold gaps.

– Closing compliance gaps / raising revenue
Including more businesses under VAT could yield extra VAT receipts and reduce the “underground economy.” A lower threshold means more businesses must collect and remit VAT, increasing HMRC’s revenues. Also, digital monitoring and MTD might make it easier to catch anomalies.

– Reducing administrative “cliff edges”
Businesses just under the threshold often behave in ways to avoid going over it (“threshold bunching”)—altering turnover, delaying work, or restricting growth. Lowering thresholds could reduce distortions caused by the VAT registration threshold.

– Digitalisation & efficiency
Since HMRC is pushing MTD more broadly, digital record-keeping is being normalised. More businesses being comfortable/required to use digital accounting/lodgement may reduce marginal cost of compliance or even make VAT registration more manageable for smaller entities. The infrastructure and software ecosystem is growing, which might make it feasible to lower the threshold without overly burdening small businesses.

– Political motivations

• • To boost economic growth: reducing small business tax / regulatory burden is often pitched as pro-growth.

  • To show a modernised tax system and fairness.

  • To plug budget shortfalls: more businesses paying VAT means more revenue.

Risks, costs & counter arguments

If the Government lowers the VAT registration threshold, there are several downsides and countervailing arguments to consider:

– Increased compliance & administrative burden for small businesses
Smaller businesses may not have the infrastructure, cash flow, or accounting capacity to deal with VAT registration, VAT returns, invoicing with VAT, etc. For many, the cost (financial, time, expertise) may outweigh benefits.

– Cash flow implications
Once registered for VAT, businesses must charge VAT (which may make their goods/services more expensive to final consumers) and pay VAT to HMRC; even though they can reclaim VAT on their inputs, poor cash flow or lagging input receipts can cause issues.

– Price inflation / consumer impact
If suppliers must charge VAT where they didn’t before, final prices to consumers could rise. That might reduce demand for certain goods or services, especially for those near poverty lines or with tight margins.

– Complexity of aligning thresholds and unintended interactions
VAT registration threshold is based on taxable turnover, whereas MTD thresholds are often about “qualifying income” (business + property income) or turnover, depending on tax. Aligning them superficially may hide differences in the basis of calculation, accounting for expenses, input VAT, etc. The specific rules matter a lot.

– Loss of revenue vs fewer households paying VAT
If the threshold is raised (as some rumours also suggest), revenue falls. If lowered, there might be more compliance but voters could see this as increasing tax burden for smaller businesses.

– Resistance from business groups
Organisations such as ICAEW have repeatedly raised concerns about lowering thresholds too quickly or before the system has bedded-in. The cost of software, training, uncertainty, penalties, etc., for businesses and agents could be significant.

– Political risk
Any change that increases the number of businesses charging VAT, adding costs to consumers or businesses, might be unpopular; could be especially sensitive in inflationary times.

How “aligned with MTD thresholds” might look in practice

If the Government were to reduce the VAT registration threshold so that it more closely mirrors the MTD thresholds, some possible models include:

Also, adjustments could be made to suggest a “soft threshold,” transitional rules, or support subsidies / software grants for small businesses to adapt.

How plausible is this happening, given timing & politics?

Looking at current evidence:

– The current VAT registration threshold is £85,000. Some media reports suggest the possibility of raising it (which goes the other way) to ease burden on small businesses.

– On the other hand, there is speculation (from think-tanks like Resolution Foundation) about lowering it to include more businesses under VAT.

– ICAEW and other bodies have expressed concern specifically about the lowering of MTD for income tax thresholds (to £20,000), particularly about the burden and speed of implementation.

Given that MTD thresholds are already being lowered in law (for income tax), some think pressure will mount to make VAT registration thresholds more aligned. But:

– Changing VAT thresholds has budgetary implications: lowering raises revenue (but increases administrative support requirement), raising threshold reduces revenue.

– Businesses just under the current threshold are vocal about the “cliff edge” effect.

– The Government must balance business burden, inflation, cost of living pressures, and the desire not to add costs to consumers.

Therefore, a shift is possible, but I see it as more likely to be a moderate change: perhaps a small lowering, or more likely an easing of rules around compliance, or more phased / simplified regimes, rather than a drastic drop all the way to £20,000 in the immediate Budget.

Who stands to gain / lose

Potential winners:

– Very small businesses just under the new threshold would gain consistency, may get inputs credit etc., and may believe that digital tools / accounting software costs are manageable. Some may benefit from being able to reclaim input VAT.

– Accountants and software vendors (since more businesses will require digital tools, VAT-compatible reporting etc.).

– HMRC/government (if threshold lowered: increased VAT receipts; more oversight; less tax leakage).

Potential losers:

– Small businesses that currently are non-VAT-registered who would need to register: burden of VAT accounting, cash flow management, software, possibly higher prices to consumers.

– Consumers of small business goods/services if VAT is added to goods that previously had no VAT in their supply chain (i.e. passed on).

– Businesses near the old threshold that might lose competitive advantage (if others under threshold can sell VAT-free).

– Administration burden for HMRC (though modernisation / MTD may reduce marginal cost over time, the upfront support and transitional costs are real).

What to watch for / signals

Here are signals to monitor, which might indicate whether the Government is moving in this direction:

– Draft legislation or consultations regarding VAT registration thresholds in Budget / Autumn Statement documents.

– Statements from Treasury, HMRC, small business ministers or committees (like the Small Business Commissioner) about threshold “cliffs” or simplifying VAT.

– Advocacy from business groups, trade bodies, accountants raising consistent concerns.

– Impact assessments from Government showing cost/benefit of lowering thresholds (impact on small businesses, HMRC, revenue).

– Whether the cost of VAT registration (compliance, software) is reduced or whether simplified VAT schemes are strengthened.

– Whether alignment with MTD rules is explicitly flagged (e.g. “bringing threshold to match MTD for Income Tax”).

Conclusion & view

In short:

• The idea of reducing the VAT registration threshold to better align with MTD thresholds is a serious possibility.

• But it is not certain, and major lowering (e.g. to £20,000) seems unlikely to happen at once without extensive transitional and supportive measures.

• More plausible is a moderate lowering (or a raise, depending on political priorities), or offering more flexibility/simplification for smaller businesses or those just at or under the threshold.

If you are a business owner, landlord, or self-employed individual around these threshold levels, it’s worth:

• Checking whether you might come under a lowered VAT threshold in the coming years.

• Preparing for the possibility: ensuring digital accounting systems are in place, understanding VAT compliance costs, and how your pricing might need adjusting.

• Keeping an eye on government consultations / draft legislation in the lead up to the Autumn Budget 2025 for concrete announcements.