631/2022 Li Liu, Ben Lockwood & Eddy Tam

This paper studies the effect of the VAT threshold on firm growth in the UK, using administrative tax data, and exogenous variation over time in the threshold, combined with turnover bin fixed effects, for identification. We find that annual growth in turnover slows by up to 2 p.p. points (almost one third of the average growth rate of 7 p.p. in our data) when firm turnover gets close to the threshold, and this growth slowdown persists for levels of turnover close to, and above the threshold. Growth in firm costs shows a similar pattern, indicating that the response to the threshold is likely to be a real response rather than an evasion response. Firms that select into the Flat-Rate Scheme have a less pronounced slowdown response than other firms. Similar patterns of turnover and cost growth around the threshold are also observed for non-incorporated businesses. Finally, 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 our empirical findings.