Jeremy Hunt has privately admitted to colleagues that he cannot further raise the VAT threshold for UK businesses because of EU rules.
The chancellor announced in his budget on Wednesday that businesses would no longer have to pay VAT if they had a turnover of less than £90,000, an increase from the previous threshold of £85,000.
Hunt told multiple MPs ahead of the budget that £90,000 was the highest he could raise the threshold because of the Northern Ireland protocol agreed with the EU.
The disclosure has angered Tory Brexiters who are critical of the protocol, which set Northern Ireland’s relationship with Britain and the EU after Brexit.
Conservative MPs and small business groups have been campaigning for the VAT threshold for UK businesses to increase significantly. The New Conservatives, a group of rightwing Tory MPs, had called for it to be raised to £250,000. The Federation of Small Businesses has called for an increase to £100,000.
But Hunt has privately told colleagues that, because of the protocol, raising the threshold above £90,000 would only be possible in Great Britain, creating a different VAT regime for Northern Ireland. A Treasury source said the chancellor did not want there to be different VAT rules in Great Britain and Northern Ireland.
Jacob Rees-Mogg, the former business secretary, told the Guardian: “It is ridiculous that our VAT policy is still decided in Brussels, especially as the threshold level is so economically important. It deters small businesses from growing and adding employees as they suddenly become 20% less competitive.”
David Jones, deputy chair of the Brexit-backing Conservative caucus the European Research Group, said it was a “great shame because the VAT threshold is too low, it’s dissuading people from setting up a business or expanding their existing businesses”.
He added: “The £5,000 increase is welcome but really colleagues were talking in terms of doubling the threshold. If it can’t be done because of the arrangements with the EU, then really the government ought to go back and start talking to the EU about it.”
The Treasury said raising the VAT threshold to £90,000 would take 28,000 small businesses across the UK out of paying the tax. The change takes effect from 1 April and is the first increase in seven years.
Under the terms of the Northern Ireland protocol and the Windsor framework negotiated by Rishi Sunak, the UK must respect the EU’s €100,000 VAT threshold when setting VAT rules in Northern Ireland. This is so that businesses in Northern Ireland do not have a tax advantage over EU businesses, ensuring a “level playing field”.
