UK: Chancellor Considers Adjustments to VAT Rates, Exemptions and Thresholds

On 29 September 2025, UK Chancellor Rachel Reeves reaffirmed no increase to the standard 20% VAT rate, per the 2024 election manifesto. However, the 26 November 2025 budget may raise funds by adjusting zero-rated or 5% VAT rates, potentially cutting the £90,000 VAT registration threshold, reducing domestic fuel VAT from 5% to 0%, or imposing VAT on private taxi/ride-sharing platforms.

VAT Exemptions and Rates: Zero-rated items include food, children’s clothing, books, and energy-saving materials; 5% rates apply to domestic fuel and children’s car seats; exemptions cover private healthcare, financial services, and more. The IFS estimates these cost £100 billion annually in lost revenue, burdening businesses and HMRC with complex compliance, while inefficiently benefiting all income levels.

Private Healthcare: Removing the VAT exemption on private healthcare could raise £2 billion annually from £10 billion in spending, though deductions by providers and employers may reduce net gains.

Financial Services: Post-Brexit, the UK can now impose VAT on banking and insurance, previously EU-exempt. Likely targets include fee-based services (e.g., crypto, fintech, payments), while loans may remain exempt. China’s 6% VAT on financial services offers a model, exempting inter-bank trading and forex.

VAT Registration Threshold Options:

• Lowering to £60,000: Increases registrations, VAT revenue, but raises small business costs and consumer prices.
• Freezing Threshold: Inflation pushes more businesses over £90,000, gradually increasing revenue but adding compliance burdens.
• Tiered Rates: A lower VAT rate (e.g., 5%) for smaller businesses broadens the tax base with less impact, but adds complexity.
• Adjusting Schemes: Reforming Flat Rate or Cash Accounting Schemes simplifies compliance while increasing registrations.
• Expanding Scope: Including exempt/zero-rated activities in turnover calculations brings more businesses into the VAT net.

Challenges: Lowering the threshold may deter small business growth, and the UK’s high threshold is already an OECD outlier. Behavioural changes could limit revenue gains.