As Chancellor Rachel Reeves prepares to deliver the Autumn Budget, attention is turning to potential reforms to VAT and duties. The Institute for Fiscal Studies has calculated the Treasury will face a fiscal shortfall of £22bn. VAT and duties are areas being eyed as key levers for revenue generation.
VAT registration threshold: A tipping point for small businesses?
The UK’s VAT registration threshold currently stands at £90,000, one of the highest in the OECD. This was increased from £85,000 in April 2024 to ease the administrative burden on small businesses. However, the Office for Tax Simplification (OTS) has argued that a threshold around this level distorts business behaviour . Many small enterprises deliberately limit their turnover to avoid VAT registration – a phenomenon known as “bunching”.
A 2017 OTS report recommended either a significant rise or reduction in the VAT registration threshold to aid businesses. A substantial rise seems unlikely as it would cut VAT receipts and the funds available to fund public services. However, there is growing speculation that Reeves may now lower the threshold to bring more businesses into the VAT net. The OTS previously estimated that a significant reduction in the registration threshold could raise £1bn – £1.5bn for the Treasury annually, although this could come at the cost of new compliance burdens on smaller businesses and potentially lead to higher prices or reduced margins.
VAT on domestic fuel and taxi fares
Environmental and fiscal pressures are prompting a review of VAT on domestic fuel. The BBC has reported that the government could intervene to bring down energy bills, for example, by cutting the current 5% rate of VAT charged on energy. Reeves has also signalled that any changes will be accompanied by “targeted action” – potentially through direct support or exemptions for vulnerable groups.
It is also likely that the Government will publish its response to an earlier consultation on the VAT treatment of private hire vehicles (PHV). There has been speculation that VAT will be introduced on all PHV fares. The consultation followed a series of legal rulings looking at how taxi and PHV firms operated. Entities such as Uber have been held to contract directly with the customer whereas some other PHV firms act as an agent for the individual drivers. Large PHV operators like Uber are VAT registered meaning that, where the operator is providing the transport services, the customer is liable for VAT on the full fare.
Currently, many drivers are not VAT-registered due to falling below the threshold. Therefore, customers contracting directly with a driver may not be charged VAT. However, reform could standardise VAT treatment across the sector, meaning all taxi and PHV fares—including those from minicabs and ride-hailing apps—could be subject to 20% VAT.
VAT treatment of PHV could have wide-reaching implications
- Consumers: Fares could rise by up to 20%, disproportionately affecting those in rural areas or with limited access to public transport. For regular users, especially those commuting or relying on taxis for medical appointments, this could represent a significant cost increase.
- Drivers and operators: The administrative burden will increase, particularly for drivers who have never had to deal with VAT compliance. Margins may shrink, and some operators may be forced to restructure or consolidate to remain viable.
- Public sector and vulnerable groups: There is concern that the reform could impact services for vulnerable populations. The government may consider zero-rating or exemptions for specific journeys, such as those booked through social care or NHS contracts, but this would add complexity to an already fragmented system.
This could form part of a broader effort to close VAT loopholes and ensure fairness across sectors. According to The Telegraph, Reeves is eyeing up smaller taxes like this to help plug the fiscal gap. This move would not breach Labour’s manifesto pledge not to raise the headline rates of income tax, National Insurance, or VAT itself.
The Capital Goods Scheme: Simplification ahead
While much of the VAT reform discussion centres on thresholds and transport, businesses should also be aware of upcoming changes to the Capital Goods Scheme (CGS). The CGS is a VAT mechanism designed to ensure that the amount of VAT reclaimed on certain assets reflects their actual use. This is particularly relevant for partly exempt businesses and organisations with non-business activities. As such, the compliance burden of the CGS often falls heavily on charities.
Key changes are:
- Raising the capital expenditure threshold for land, buildings, and civil engineering works from £250,000 to £600,000 (excluding VAT).
- Removing computers from the list of assets covered by the scheme.
These changes are expected to reduce the number of assets subject to CGS, easing administrative burdens for some businesses.
In summary
The Autumn Budget 2025 is shaping up to be a pivotal moment for UK tax policy. While aimed at plugging fiscal gaps, the potential reforms to VAT and duties must balance revenue generation with fairness and simplicity. Lowering the VAT threshold could boost receipts. But it risks increasing the compliance burden on small businesses and pushing up costs for individuals. Taxing taxi fares may level the playing field between operators but could hurt consumers and strain local transport services.
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