## VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence

_IMF Working Papers, September 27, 2019_

## Source details

**Canonical URL:** [VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence](https://www.imf.org/en/publications/wp/issues/2019/09/27/vat-notches-voluntary-registration-and-bunching-theory-and-uk-evidence-48669)

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## Bibliographic details
- Authors: Li Liu, Ben Lockwood, Miguel Almunia, Eddy H.F. Tam
- Published: September 27, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513513812.001

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### Main findings
- Using administrative tax records for UK businesses, the authors document both:
  - bunching in annual turnover below the VAT registration threshold, and
  - persistent voluntary registration by almost half of the firms below the threshold.
- The empirical analysis uses linked VAT and corporation tax records from 2004-2014.
- The authors find empirical support for the predictions of their conceptual framework.

### Conceptual framework and theoretical predictions
- The framework simultaneously explains the coexistence of:
  - bunching just below the VAT registration threshold, and
  - substantial voluntary registration by firms below the threshold.
- The framework predicts that the following factors increase the likelihood of voluntary registration:
  - higher intermediate input shares,
  - lower product-market competition, and
  - a lower share of business to consumer (B2C) sales.
- The framework predicts the exact opposite impacts of these factors on bunching.

### Empirical strategy and evidence
- Data: linked VAT and corporation tax records covering 2004-2014.
- Key empirical matches to theory:
  - Evidence of bunching in annual turnover below the VAT registration threshold.
  - Evidence that almost half of firms below the threshold are voluntarily registered.
  - Empirical relationships consistent with model predictions regarding:
    - intermediate input shares,
    - product-market competition, and
    - share of B2C sales.
- The analysis documents persistent voluntary registration behavior alongside bunching, and attributes heterogeneity in firm responses to the predicted firm-level characteristics.

### Policy-relevant implications
- Heterogeneous firm responses to VAT registration notches imply that simple threshold-based policy changes may produce mixed behavioral outcomes:
  - Policies that alter the registration threshold will interact with firm input structures, market competition, and B2C exposure to produce divergent effects on voluntary registration and bunching.
- Diagnostic analysis of firm-level characteristics (intermediate input shares, measures of product-market competition, and B2C share) can help predict which firms are more likely to voluntarily register versus bunch below the threshold.
- Revenue and compliance effects of VAT threshold reforms should account for:
  - the coexistence of voluntary registration and bunching,
  - the opposing predicted effects of firm characteristics on these behaviors.

*VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/09/27/vat-notches-voluntary-registration-and-bunching-theory-and-uk-evidence-48669_