DP13983 VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence

Author(s): Miguel Almunia, Li Liu, Ben Lockwood, Eddy H.F. Tam
Publication Date: September 2019
Date Revised: September 2019
Keyword(s): bunching, UK, Value-Added Tax (VAT), Voluntary registration
JEL(s): H21, H25, H32
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13983

Using administrative tax records for UK businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition and a lower share of business to consumer (B2C) sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004-2014, finding empirical support for these predictions.