It’s hard to believe that at a time when everyone in government and business needs to be straining every sinew to drive growth, a major part of the tax system is actively suppressing economic activity.

But, right now across the UK, tens of thousands of small firms and self-employed individuals are deliberately scaling back their operations to keep turnover under the £85,000 VAT registration threshold.

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This is not, of course, a new problem. The costs and administration associated with becoming VAT-registered have been deterring smaller operators from expanding for years.

But, with a sustained period of high inflation pushing up prices – increasing turnover on paper, while not enhancing profitability – many more are now hovering perilously close to the VAT trigger point.

Indeed, it’s estimated that by 2025, some 44,000 traders across the UK will be deliberately keeping their turnover just below the threshold. And, according to the Office for Budget Responsibility, this “bunching” is costing the country hundreds of millions of pounds in lost economic activity.

That’s why, in a paper published last week, the Federation of Small Businesses (FSB) is pushing for the threshold to be lifted to £100,000.

The potential of this move is clear. Two in five firms with a turnover of between £75,001 and £100,000 feel the £85,000 threshold is a barrier to growth. Three in ten in that bracket say raising it would encourage them to invest.

It’s also worth noting that had the current threshold, fixed in 2017, kept pace with inflation, it would be just over £100,000 today in any event.

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Of course, a threshold is still a threshold, regardless of where you put it. And part of the issue with VAT is obviously that the instant you’re a penny over the line, you enter a whole new world of expense and complexity.

We’re therefore also arguing for some sort of smoothing mechanism to ease the transition for those who find themselves just on the wrong side of the VAT-registration line.

We could, for example, introduce a “VAT allowance”, under which small businesses’ annual VAT liability could be reduced by a set amount (say, £5,000) – similar to the existing Employment Allowance, which can be offset against small firms’ National Insurance bills.

Alternatively, HMRC could introduce some form of rebate, whereby small businesses with a turnover up to £20,000 higher than the threshold could apply for a discount on their net VAT bill. This discount would then decrease as their turnover increased. So, assuming a threshold of £100,000, the idea would be that businesses turning over between £100,000 and £109,999 would be given a 20% discount on their net VAT, while those with a turnover of £110,000 to £119,999 would get 10%.

And, again, if you want to look at the potential economic benefits, we found that one-fifth of small firms reckoned a discount on the VAT payable after they just reached the threshold would incentivise them to invest in and expand their businesses. This rises to four in 10 in the hospitality sector and 23% in wholesale and retail.

The other thing about VAT is how devilishly complicated the rules are. We all know the Jaffa Cake case – is it a zero-rated cake or a vatable chocolate biscuit? – which famously turned on whether it goes hard or soft as it goes past its best. But there are slew of rules and rulings on what is vatable, exempt or zero-rated – not least last year’s High Court ruling that taxi passengers should be charged 20% VAT on each ride they take, which we are pressing ministers to overturn.

Staying on top of these complex rules causes headaches for small firms, which UK-wide spend £25 billion every year on tax compliance.

Noting that it’s now six years since the Office of Tax Simplification undertook its review of VAT, Richard Wild, head of tax technical at the Chartered Institute of Taxation, was spot on when he said last week that “it’s time to take the issue out of the too-difficult box”.

Indeed, it’s the complexity and practical effects of VAT that are precisely the reasons it must be tackled. And if he’s determined to focus on growth, the Chancellor has the ideal opportunity to do so in March’s Spring Budget.

Colin Borland is director of devolved nations for the Federation of Small Businesses (FSB)