The current £85,000 threshold at which businesses must register for VAT has been frozen until April 2020 while the government deliberates on its approach to the tax.
Chancellor Philip Hammond considered lowering the VAT-registration threshold before Autumn Budget 2017 to bring it closer to global standards and the EU average of £20,000.
Estimates suggested reducing it to £43,000 would net the Treasury an extra £1.5 billion a year, while decreasing the threshold to £25,000 could fetch up to £2 billion.
The Office for Tax Simplification said more than half a million businesses currently below the registration threshold would need to register for VAT if it was lowered.
IPSE warned against decreasing the threshold, arguing this would “actively discourage” growth and force business owners to either raise prices or absorb the costs.
Instead, the organisation suggests raising the threshold annually in line with the retail prices index measure of inflation, which it says would incentivise growth and innovation among small businesses.
Andy Chamberlain, deputy director of policy at IPSE, said: “Presently, the self-employed contribute £271 billion to the UK economy every year.
“Increasing the VAT threshold would create a nurturing environment for our smallest businesses to thrive, expand and further increase the overwhelming value they provide.”