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VAT Notches, Voluntary Registration, and Bunching: Theory and U.K. Evidence

Li Liu¹; Ben Lockwood²; Miguel Almunia³; Eddy H.F. Tam⁴

¹ International Monetary Fund and Oxford University Centre for Business Taxation · ² University of Warwick, Oxford CBT, and CEPR · ³ Colegio Universitario de Estudios Financieros (CUNEF), CEPR, CAGE, and Oxford CBT · ⁴ Oxford CBT

Using administrative tax records for U.K. 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 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 to 2014, finding empirical support for these predictions.

DOI

10.1162/rest_a_00884

Volume

103 (1)

Pages

151-164

Language

en

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