Preferring the scalpel to the sledgehammer, a freeze on thresholds and changes to who actually pays the tax could be keynotes of the Budget. By Tony Cochrane

John Healey will deliver his first Budget tomorrow with one VAT number he is highly unlikely to touch. Labour promised not to raise VAT, and the 20 per cent standard rate is as safe as anything in the tax system. That said, anyone who concludes that VAT will be a quiet corner of this Budget has not been paying attention.

Since taking office, Labour has imposed VAT on most fee-paying private school education and closely related boarding; restricted Motability reliefs; and excluded standalone private hire and taxi passenger transport from the Tour Operators’ Margin Scheme (TOMS). None of those measures changed the headline rate. All of them changed who pays. That, not the 20 per cent, is where businesses and their advisers should be looking this autumn.

The pattern was set early. The manifesto ruled out higher VAT rates while promising to end the exemption for private school fees. The second commitment has been implemented, and the first has so far been maintained. From 1 January 2025, specified education, vocational training and closely related boarding supplied by private schools became taxable, subject to exclusions.

Anti-forestalling rules caught relevant payments received from 29 July to 29 October 2024 and, overall, the measure was expected to raise about £1.5 billion in 2025–26. It was also a reminder that “no VAT rise” is a promise about rates, not about the tax base.

The 2025 Budget followed the same approach. Top-up payments for higher value Motability vehicles became standard rated from 1 July 2026, though adapted vehicles kept their relief.

Most private hire and taxi journeys were excluded from TOMS, meaning that more VAT was due, with complex rules differentiating supplies made directly by drivers to passengers to those with the apps and booking platforms. A new relief was also introduced for eligible goods that businesses donate to charities.

Elsewhere, Labour has increased Capital Gains Tax and employer National Insurance contributions, changed the taxation of former non-domiciled individuals, and used threshold freezes to increase receipts. The government is willing to raise tax. With VAT, it prefers the scalpel to the sledgehammer.

Now there is a new Prime Minister who calls his administration a cost-of-living government, and a Chancellor who needs to pay for it. Here are the five VAT changes I would watch for. 

1. Extending the electricity zero rate

Andy Burnham’s first significant act as Prime Minister was to announce that qualifying domestic electricity in Great Britain would be zero rated for VAT from 1 October 2026 to 31 March 2027.

The measure is expected to reduce the annualised Ofgem price cap by around £45 per household, a saving of roughly £22.50 over the six months the relief applies, and to cost about £850 million in 2026–27.

The relief applies to electricity only, not gas, and does not extend to Northern Ireland, where the Windsor Framework prevents a zero rate and equivalent funding is provided to the Executive instead.

The measure is funded only for the current financial year, and the government has expressly left longer term funding to the Budget. So this is not really a Budget prediction, but, likely, a Budget decision.

Letting the relief lapse next spring would put bills up six months after the government took credit for bringing them down, and that would be politically challenging. The real question is whether Mr Healey extends it for another fixed period or finds the lasting funding to make it permanent. I expect a fixed period extension. 

2. Widening relief to other fuels

Despite the headlines, the cut applies only to electricity. Households heating their homes with gas or oil continue to pay 5 per cent. Extending the zero rate to all domestic fuel and power would answer that criticism, but it would cost substantially more.

Northern Ireland is a further complication because it remains subject to a different VAT framework for goods. The Great Britain electricity VAT reduction does not apply there: qualifying electricity remains reduced rated, and comparable support is being provided through the Executive.

Widening the Great Britain relief would increase the pressure to address that difference. I think the more likely outcome is help for gas and oil customers delivered outside VAT altogether.

3. Repeating the family meals and attractions reduction

This summer’s temporary 5 per cent rate ran from 25 June to 1 September. It covered qualifying children’s meals, specified children’s tickets and admission to qualifying family attractions, and it tells us a lot about Labour’s instincts. It was far narrower than the 2020 pandemic cut, which covered hospitality, accommodation and attractions across the board.

The trade will lobby hard for something bigger and permanent. This debate has been going on for quite some time, and I would be surprised to see it succeed.

A permanent sector wide reduced rate would be expensive, difficult to target and politically difficult to reverse. What Mr Healey will want to know is whether the summer scheme created new spending or simply cut the tax on meals and outings that families would have paid for anyway.

Unless the evidence is clearly in its favour, I expect at most a repeat time-limited scheme for summer 2027. Businesses that spent the summer reconfiguring tills and menus for a 69-day relief should hope that, if it returns, it returns in substantially the same form.

4. Extending energy-saving materials relief

The zero rate on qualifying installations of energy-saving materials in homes, such as insulation, heat pumps and solar panels, expires on 31 March 2027 and then reverts to 5 per cent. The Budget is the most obvious opportunity to extend it before then.

Letting it lapse would raise the upfront cost of the very improvements the government says it wants households to make. A fixed period extension fits almost every stated policy objective and would avoid an abrupt return to the 5 per cent rate.

If there is room, the scope could also be updated, but this is an area where definitions matter. Disputes commonly turn on whether a job is the installation of qualifying materials or a wider package of building works that happens to include some. Any change should bring clearer rules, not just a new end date.

5. Freezing the registration threshold and consulting on reform

A business must register for VAT once its taxable turnover exceeds £90,000 in any rolling 12-month period or is expected to exceed it in the next 30 days alone. The threshold spares the smallest businesses the compliance burden, but it creates one of the sharpest cliff edges in the tax system.

For a consumer-facing business with limited input tax recovery, crossing it can mean choosing between materially higher prices and absorbing the VAT in its margins. Businesses approaching the threshold may turn away work to stay below it. That is bad for them and bad for growth.

The right level for the threshold has been argued over for almost a decade. Since the Office of Tax Simplification’s 2017 report highlighted how it holds back growth, some have called for a significant increase, with figures as high as £250,000 suggested, and others for a sharp cut to around £40,000–£50,000.

Successive governments have avoided deciding either way. The threshold has been £90,000 since April 2024 and was left unchanged in both the Autumn 2024 and Autumn 2025 Budgets. Ministers have preferred to point out that it is already higher than in any EU member state.

Northern Ireland may complicate any move upwards. Since January 2025, EU rules have capped the thresholds member states can set for small business exemptions at €85,000. The UK’s current threshold already exceeds that and applies across the whole UK.

Even so, some EU VAT rules continue to apply in Northern Ireland under the Windsor Framework, so a substantial rise could raise questions about how far NI can follow. A threshold of £250,000 in Great Britain alongside a lower one in Northern Ireland would be difficult to manage, both politically and in practice.

Labour’s 2024 manifesto did not say whether its pledge not to raise VAT covers the threshold. A freeze brings more businesses into VAT each year as prices rise, and it is exactly the kind of quiet revenue raiser Labour has relied on in office. I expect a freeze.

A consultation on smoothing the cliff edge would be the most useful thing John Healey could announce for small businesses in his first Budget on 28 October, at little short-term cost.

Where the money comes from

Most of the reliefs above would cost money, while freezing the registration threshold could raise it. Either way, the Chancellor will need to balance visible concessions with revenue raising measures elsewhere.

Labour’s record suggests at least part of that revenue will come from inside VAT, using the approach it has taken from the start: finding reliefs, schemes and exemptions that look generous or out of date, and narrowing them.

The Motability and private hire changes did not make the front pages, but they were exactly this kind of measure: targeted, technical and defensible as fairness rather than as a tax rise. I would expect more of them.

Businesses that rely on a special scheme, a relief or a favourable liability ruling should read the Budget documents, not just the speech. The measures that matter most to them are likely to be in the small print.

What it adds up to

The safest prediction for 28 October is not that Labour will break its promise on the standard rate. It is that the government will keep working on the edges of VAT: temporary relief where it wants to lower bills or encourage spending, and tighter eligibility where it wants revenue or can make the case for fairness.

For businesses, the important questions are therefore about scope, eligibility and duration. Does the relief I rely on survive? Does it still cover what I supply? When does it end? The 20 per cent rate will probably be unchanged on 29 October. Plenty else may not be.

Tony Cochrane is a Chartered Tax Adviser, an Associate of the Institute of Indirect Taxation and a director at VITA.