Small traders and entrepreneurs are expected to benefit from an overhaul in the VAT system which is set to be announced by Philip Hammond during the Spring Statement on Tuesday.

The Chancellor is expected to launch a review into the system which could lead to a gradual introduction of VAT on firms with a turnover of more than £85,000 a year.

The Daily Telegraph understands that Mr Hammond wants to see a gradual introduction of 20 per cent VAT above £85,000 in a series of "steps".

The announcement is likely to form part of the Chancellor's spring statement, which will be dominated by a better-than-expected economic outlook.

This year's speech to be MPs will be a slimmed down affair, lasting just 20 minutes because of Mr Hammond's decision to use the Budget in November to set out any big tax changes.

One source said Mr Hammond is expected to be more optimistic about the economy than MPs have heard before.

Currently there is a 'cliff edge' which means that firms are hit with a sudden VAT bill when their annual turnover reaches £85,000.

This also causes a “bunching” of companies just below the £85,000 threshold because they have an incentive not to cross it and risk squeezing their profit margins.