Most countries’ VAT thresholds are closer to £20,000, the OTS says, and it suggests the UK’s higher threshold ‘influences and distorts business behaviour’.

Furthermore, it adds, HMRC data indicates that 44% of businesses registered for VAT actually operate below the threshold, with an ‘unusual number’ operating ‘just below’.

Having spoken to stakeholders, the OTS cited examples of businesses refusing to take on another contract until the year end; physically closing their store, restaurant or B&B for a month or two each year; and deciding against taking on a part time employee or apprentice in order to remain below the threshold.

‘While traders are entitled to take as much time off as they wish, would fewer do so to such an extent if they didn’t face a large VAT penalty for continuing to trade?’ it asked.

‘Alternatively would this be solved by a much lower threshold like most EU and many non-EU states, so that any established business would be subject to VAT and the competitive disadvantage removed?’

Conversely, it is also looking at the potential impact of raising the threshold significantly, despite the UK only able to raise the level in line with inflation at present. Singapore currently operates a goods and services tax registration of S$1m (£572,000), totally excluding all small businesses.

‘Potentially that would exclude more businesses – so would the simplification gain be worth the risk of more distortion in the marketplace?’ the report asks.

The OTS is seeking views on this and other areas of VAT including the complexities of the ‘multiple rates’ in place; partial exemptions; special accounting schemes; penalties and appeals; formal ruling system; and VAT and Making Tax Digital.

John Whiting, who vacates his role as tax director for the OTS on 1 March 2017, told CCH Daily: ‘It does mean a lot of businesses would have to register of course. But more and more it’s coming through that this is damaging the market place. Your business is turning over £100,000 and you are registered. Mine is £70,000 and I’m not registered. Does that mean I’m unfair competition for you?

‘There are more and more people managing the situation by stopping work, stopping doing extra things and stopping expanding. It’s almost an article of faith that the threshold keeps going up, but it’s time to at least question that.’ 

The OTS can be reached by emailing:  [email protected]

The progress report and call for evidence can be read here.