Philip Hammond is mulling an overhaul to the VAT system that could affect thousands of small businesses as part of next week's Budget.
The chancellor is considering dropping the current threshold – which stands at a turnover of £85,000 – in a move that could raise as much as £2bn in taxes.
City A.M. understands the motivation is not just revenue raising, but about bringing the UK in line with other countries. The UK currently has a significantly higher threshold than other European countries. It is also thought the existing threshold acts as a deterrent to small businesses, which either stop trading or lie to avoid having to pay the 20 per cent tax.
The Treasury is understood to be considering a range of options, including lowering the threshold to anywhere between £20,000 and £40,000, or freezing the threshold, which currently rises with RPI each year. The department is currently assessing a report published by the independent Office of Tax Simplification, which argues that as it stands the threshold distorts the tax system.
The report estimates that halving the threshold would affect nearly half a million small firms and give a £1bn boost to the country's coffers, while dropping it to £25,000 would yield £2bn.
But City A.M. understands details are still being worked out, with just over a week to go until it is revealed. Either way, a radical Budget is not expected come 22 November.
It is also thought it will contain some nods to the government's industrial strategy white paper, which is expected to be published ahead of the new year.
Alan Mak MP, a former City lawyer who chairs the all party parliamentary group (APPG) on entrepreneurship, is calling for the government to include a commitment to the fourth industrial revolution.
He argues that, as the UK leaves the European Union, there is an opportunity to introduce an "innovation principle" that would enable the country to lead the way in robotics, AI and technology. Mak is also calling on the government to ring-fence a portion of previously announced funding to underpin a seeding scheme akin to the London Fund introduced to help tech startups when Boris Johnson was mayor.
"If we want to be a world leader, boost productivity and growth, and not just be a Brexit government, this is the kind of thing we need to look at," he told City A.M.
A spokesman for the Treasury declined to comment.