{
  "title": "Small Firm Growth and the VAT Threshold Evidence for the UK",
  "publication": "IMF Working Papers, February 16, 2024",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2024/02/16/small-firm-growth-and-the-vat-threshold-evidence-for-the-uk-544462",
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  "summary": "This paper studies 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.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- 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.\n- Authors: Li Liu, Ben Lockwood, Eddy H.F. Tam.\n- Date: February 16, 2024.\n- Publication series: IMF Working Papers, Working Paper No. 2024/033.\n- Pages: 39.\n- DOI: https://doi.org/10.5089/9798400267260.001.\n- ISBN: 9798400267260.\n- ISSN: 1018-5941.\n- Subject keywords: Compliance costs, Econometric analysis, Revenue administration, Taxes, Threshold analysis, Value-added tax."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold.\n- No evidence of higher growth when the threshold is passed.\n- 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."
    },
    {
      "heading": "Heterogeneity in responses",
      "content": "- Voluntary registered firms (firms that habitually register even when turnover is below the VAT threshold) have growth that is unaffected by the threshold.\n- Firms that select into the Flat-Rate Scheme exhibit a less pronounced slowdown response than other firms."
    },
    {
      "heading": "Non-incorporated businesses",
      "content": "- Similar patterns of turnover and cost growth around the threshold are observed for non-incorporated businesses."
    },
    {
      "heading": "Simulation and interpretation",
      "content": "- 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."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- 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).\n- The similarity of turnover and cost responses implies real behavioral adjustments by firms rather than primarily tax evasion.\n- 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.\n\nIMF 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.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2024/02/16/small-firm-growth-and-the-vat-threshold-evidence-for-the-uk-544462"
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    "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",
    "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.",
    "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.",
    "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.",
    "Similar patterns of turnover and cost growth around the threshold are observed for non-incorporated businesses.",
    "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.",
    "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.",
    "**Working Paper**"
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