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

Author

Listed:
  • Mr. Ben Lockwood
  • Ms. Li Liu
  • Eddy H.F. Tam
  • Miguel Almunia

Abstract

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.

Suggested Citation

  • Mr. Ben Lockwood & Ms. Li Liu & Eddy H.F. Tam & Miguel Almunia, 2019. "VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence," IMF Working Papers 2019/205, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2019/205
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    References listed on IDEAS

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    Cited by:

    1. Asatryan, Zareh & Gomtsyan, David, 2020. "The incidence of VAT evasion," ZEW Discussion Papers 20-027, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    WP; unit cost; standard deviation; Value‐Added Tax (VAT); Voluntary Registration; Bunching; year dummy; input cost ratio; account database; responses to notch; turnover net; Value-added tax; VAT registration thresholds; Compliance costs; Competition; Corporate income tax;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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