Small Firm Growth and the VAT Threshold Evidence for the UK
IMF Working Papers, February 16, 2024
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Bibliographic details
- Authors: Li Liu, Ben Lockwood, Eddy H.F. Tam
- Published: February 16, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400267260.001
Overview
- Paper objective: study the effect of the VAT threshold on firm growth in the UK, using exogenous variation over time in the threshold combined with turnover bin fixed effects for identification.
- Authors: Li Liu, Ben Lockwood, Eddy H.F. Tam.
- Date: February 16, 2024.
- Publication series: IMF Working Papers, Working Paper No. 2024/033.
- Pages: 39.
- DOI: https://doi.org/10.5089/9798400267260.001.
- ISBN: 9798400267260.
- ISSN: 1018-5941.
- Subject keywords: Compliance costs, Econometric analysis, Revenue administration, Taxes, Threshold analysis, Value-added tax.
Key empirical findings
- Annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold.
- No evidence of higher growth when the threshold is passed.
- Growth in firm costs shows a similar pattern to turnover growth around the threshold, suggesting the response is likely a real response rather than an evasion response.
Heterogeneity in responses
- Voluntary registered firms (firms that habitually register even when turnover is below the VAT threshold) have growth that is unaffected by the threshold.
- Firms that select into the Flat-Rate Scheme exhibit a less pronounced slowdown response than other firms.
Non-incorporated businesses
- Similar patterns of turnover and cost growth around the threshold are observed for non-incorporated businesses.
Simulation and interpretation
- Simulation results clarify the relative contribution of "crossers" (firms who eventually register for VAT) and "non-crossers" (those who permanently stay below the threshold) in explaining the empirical findings.
Policy-relevant implications
- The VAT threshold is associated with a measurable distortion in firm growth dynamics concentrated near the threshold (about 1 percentage point slowdown in turnover growth).
- The similarity of turnover and cost responses implies real behavioral adjustments by firms rather than primarily tax evasion.
- Policy design and administrative options (including interactions with voluntary registration and the Flat-Rate Scheme) matter for how size-based VAT thresholds affect firm growth.
IMF Working Paper — "Small Firm Growth and the VAT Threshold Evidence for the UK", Li Liu, Ben Lockwood, Eddy H.F. Tam, February 16, 2024, Working Paper No. 2024/033.
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