Two leading business groups have warned that lowering the VAT threshold could be "a disaster" for small businesses.
Citing the average £20,000 level across the EU, the report concluded that the current level of the VAT threshold and its "cliff edge" nature serves to distort taxpayer behaviour. At present, many small business owners can earn sufficient income to support themselves without going over the VAT threshold.
However, freelancer body IPSE has said that lowering the VAT threshold, either in the Autumn Budget or after, would be "a disaster" for self-employed people.
Tom Purvis, IPSE's economic advisor, said: "If the chancellor adopts the OTS's proposals, it would be seen as just another cash grab - part of a sustained attack on the self-employed. It would follow harmful changes to IR35 in the public sector, the introduction of dividend taxes and, most recently, the delay to scrapping Class 2 NICs. At a time when the UK flexible labour market is one of our biggest competitive advantages, we should be looking to promote self-employment, not stifle it."
The Association of Taxation Technicians (ATT) has also warned that any significant reduction in the VAT registration threshold could increase costs and burdens for small businesses.
Yvette Nunn, co-chair of ATT's Technical Steering Group, said: "We are concerned that any significant reduction in the VAT threshold would result in unwelcome costs and burdens for small businesses - as well as increasing the tax burden on households in the form of additional VAT."
The OTS report predicts that reducing the VAT threshold from £85,000 to £43,000, for example, would impact between 400,000 and 600,000 businesses. These firms, said Nunn, would face "the additional administrative requirements and costs associated with VAT registration and, where they sell to the public, the choice between putting up prices by 20% or absorbing some or all of the VAT charge themselves."
In addition, Nunn has warned that reducing the VAT threshold would mean that many more small firms would have to comply with Making Tax Digital (MTD) from 2019.
"Any reduction in the VAT threshold would draw small businesses into MTD record-keeping obligations earlier than they may have expected," said Nunn. "HMRC already estimates the annual VAT compliance cost for a small business to be around £675 per year and that is without factoring in MTD obligations."