VAT notches, voluntary registration and bunching: Theory and UK evidence

We develop a conceptual framework that allows simultaneously for (i) voluntary registration for VAT by firms below the registration threshold; and (ii) bunching at the registration threshold. This framework also generates predictions about how voluntary registration and bunching are related to intensity of input use, the share of B2C transactions for a firm, opportunities for evasion via under-reporting of sales, and the competitiveness of the market in which the firm is located. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, we find that voluntary registration is positively related to the intensity of input use and negatively to the share of B2C transactions, and the amount of bunching is related to these variables in the opposite way. There is some evidence that product market competition leads to more voluntary registration, and less bunching. In addition, we find some suggestive evidence that firms are bunching by under-reporting sales.