Labour tax adviser suggests slashing VAT threshold

A former top civil servant who is advising Labour on tax has suggested the threshold for VAT registration should be halved in a move which would hit hundreds of thousands of small businesses.

Sir Edward Troup, a former head of HMRC, said that lowering the threshold would have “been a better way to remove a barrier to growth” than the Government’s recent decision to raise it.

Labour announced earlier this month that Sir Edward would be advising the party on “improving tax compliance” and “modernising” HMRC.

In March’s Budget, Jeremy Hunt increased the VAT threshold from £85,000 to £90,000.

The Chancellor said the change would “reduce the administrative and financial impact” of the tax and that it would “bring tens of thousands of businesses out of paying VAT altogether and encourage many more to invest and grow”.

‘Barrier to growth’

However, the move was criticised at the time by Sir Edward. Responding to the news on X, formerly known as Twitter, he said: “Halving the threshold would have been a better way to remove a barrier to growth.”

Such a move would result in hundreds of thousands of additional small businesses having to charge VAT.

According to one set of costings seen by The Telegraph, lowering the threshold to £50,000 – a figure close to Sir Edward’s suggestion – would mean 351,000 more businesses having to register for the tax in 2025-26.

Sir Edward and others have argued for the threshold to be lowered on the basis that it is high by international standards, and because there is evidence that small businesses limit their annual turnover to avoid having to register.

‘Back to square one’

However, Nigel Huddlestone, the Financial Secretary to the Treasury, said: “This is further proof that Labour are not serious about cutting taxes for businesses and working people.

“Labour would take us back to square one by hammering businesses with tax rises.

“Meanwhile this Conservative Government is sticking with the plan to reward hard work – putting £900 back in the pocket of the average worker earning £35,400 a year.”

As well as being a former HMRC permanent secretary, Sir Edward previously worked as a special adviser to Lord Clarke, the former Tory chancellor.

Earlier this month, Labour announced that he had been appointed to an expert panel to provide advice on reforming HMRC.

Influential figures

Sir Edward is one of a number of influential Labour-linked figures who have advocated for lowering the VAT registration threshold.

The Resolution Foundation think tank, which is led by the former Labour adviser Torsten Bell, has proposed reducing it to £30,000 on the basis that it is “currently both expensive and acts as a disincentive for small firms to grow”.

Dan Neidle, a tax expert and Labour activist, meanwhile labelled the decision to increase the threshold as the “biggest disappointment in the Budget” because “there’s so much evidence the current high level is damaging”.

Some organisations on the Right, such as the Adam Smith Institute, have also in the past made the argument for reducing the VAT threshold to get rid of the “bunching” effect of small businesses curtailing their revenue to avoid breaching it.

A Labour spokesman said: “This is not Labour policy. Edward Troup is a member of a panel convened by shadow financial secretary James Murray, assisting Labour’s plans to clamp down on tax avoidance.

“After 14 years of Tory chaos, Labour’s clampdown on tax avoidance will help fund an NHS that has been brought to its knees and meals for children at schools across the country.

“The Conservatives have failed on the economy, creating a high-tax, low-growth economy that has left our public services in a dire state. It’s time for the Prime Minister to call a general election and a Labour government who will grow our economy and rebuild our NHS.”

The comment from Sir Edward is not his first to cause controversy. It emerged earlier this month that he had suggested “codger” pensioners should face higher taxes and be stripped of free TV licences.