| Fiscal year | Lagged RPI used | Baseline | Policy | HMRC revenue impact (£m) |
|---|---|---|---|---|
| 2024–25 | — (frozen) | £85,000 | £90,000 | –150 |
| 2025–26 | — (frozen) | £85,000 | £90,000 | –185 |
| 2026–27 | 2024–25: +2.0% | £87,000 | £90,000 | –125 |
| 2027–28 | 2025–26: +2.5% | £89,000 | £90,000 | –50 |
| 2028–29 | 2026–27: +3.0% | £92,000 | £90,000 | +65 |
VAT thresholds, revenues, and the role of counterfactuals
No, the UK's Office of Budget Responsibility has not projected that raising the VAT threshold would increase tax revenues.
The Telegraph reported today that UK Chancellor Rachel Reeves is considering raising the VAT registration threshold—the turnover level at which businesses must register for and charge VAT. Reporter Szu Ping Chan wrote:
Sources highlighted that the Office for Budget Responsibility (OBR) had determined that former chancellor Jeremy Hunt’s decision to raise the threshold from £85,000 in 2024 increased revenues for the Exchequer by the end of the decade, even though the policy had short-term costs.
Readers might interpret this as evidence the VAT sits on the right side of the Laffer curve—where tax cuts generate enough growth to pay for themselves. Four major AI models—ChatGPT, Claude, Gemini, and Grok—reached this conclusion when I tested them, attributing long-run gains to reduced bunching and stronger business growth.
The actual explanation is simpler. The revenue increase in 2028-29 occurs because the policy threshold of £90,000 falls below what the baseline threshold would reach through inflation indexing.
What the government projected
While Chan did not link an OBR reference, the sources were likely referring to HMRC's policy paper from March 2024, which analyzed raising the VAT threshold from £85,000 to £90,000. The OBR certified their finding that the measure would reduce revenues in the first four years before increasing them in 2028-29.
HMRC states directly below this table: "This measure is not expected to have any significant macroeconomic impacts."
The revenue increase in year five requires a different explanation.
The role of the counterfactual
In a footnote, HMRC refers to a policy costings document for more detail, but it doesn’t shed light on the question. Instead, we must rewind another year to the OBR's March 2023 analysis (emphasis mine):
One of the many aspects of the tax system that is currently subject to a freeze (meaning a threshold that typically rises with inflation is frozen in cash terms) is the turnover threshold at which firms must register for VAT. It reached £85,000 in 2017-18 and on current policy will be frozen at that level for eight years, until March 2026.a Our forecast assumes that this freeze will raise £1.4 billion a year in VAT revenues by 2027-28, by increasing the number of firms within the VAT system by 169,000 compared with indexing the threshold to RPI inflation.
The baseline freezes the threshold at £85,000 until March 2026, then indexes it to the Retail Price Index (RPI) inflation measure. Once the indexed baseline exceeds £90,000, the policy becomes a relative tax increase.
Running the numbers
I couldn’t find the government’s baseline VAT threshold projections as of March 2024, so I reconstructed them using OBR's RPI forecasts from Table A-1 of their March 2024 Economic and Fiscal Outlook (EFO):
2.0% from 2024 to 2025
2.5% from 2025 to 2026
3.0% from 2026 to 2027
Applying these rates to the thresholds, and rounding per historical standards, yields:
By 2028-29, the baseline threshold reaches £92,000 through inflation indexing. The £90,000 policy threshold sits £2,000 lower, generating £65 million in additional revenue.
Conclusion
Raising the VAT threshold could boost UK growth by reducing tax distortions, cutting administrative burdens, and eliminating cliff-edge effects that deter firms from expanding. It could also dampen growth through higher deficits and larger cliff-edge impacts—firms approaching £90,000 have more revenue at stake than those approaching £85,000, potentially creating stronger disincentives to growth. The government's projections incorporate none of these effects.
The revenue increase in 2028-29 reflects inflation indexing. The £90,000 threshold generates additional revenue because it falls below an inflation-adjusted baseline of £92,000, not because of economic growth effects.