An growing variety of small companies are holding again development to keep away from bumping up in opposition to the £85,000 worth added tax (VAT) threshold.

Tax Coverage Associates, a taxation thinktank, estimates that as many as 26,000 small companies intentionally held again development in 2018-19, the most recent 12 months for which information can be found, to keep away from having to register for or cost VAT.

The thinktank obtained information from HM Income & Customs by a freedom of data request.

Many sole merchants attempt to duck paying VAT as a result of registering for the tax can lower income by 20 per cent in the event that they wander over the £85,000 threshold by solely a small quantity. So, if a small enterprise earns £100,000, they’re then £20,000 worse off than if that they had simply stayed beneath £85,000 threshold.

Not solely does the VAT threshold eat into income, if prospects are unwilling to pay 20 per cent further, however VAT registration and reporting means registering for HMRC’s Making Tax Digital tax reporting system, which prices companies tons of of kilos to hire software program.

Avoiding the VAT threshold is very engaging to self-employed tradesmen akin to builders or plumbers.

However extra sole merchants are being dragged in direction of the £85,000 VAT threshold in any case due to inflation.

The Federation of Small Companies has referred to as on the federal government to extend the brink to £100,000, which its analysis stated might assist 1.4m companies to develop.

Nevertheless, the common VAT threshold within the EU is simply £30,000.

Ben Lockwood, professor of economics on the College of Warwick, advised the Monetary Occasions that the present £85,000 threshold is “most likely the worst of each worlds”, because it allows small companies to function fairly successfully with out paying VAT whereas disincentivising development.