The Institute of Independent Professionals and the Self-Employed (IPSE) has called for the VAT threshold to be increased, in response to a government consultation.
The current £85,000 threshold at which businesses must register for VAT has been frozen until 2020, while the government deliberates on its approach to the tax.
The organisation warns against decreasing the threshold, arguing this would "actively discourage" growth as well as forcing business owners to either raise prices or absorb the cost.
Instead, it suggests raising the threshold annually in line with RPI, which it says would incentivise small businesses growth and innovation.
The comments came in response to the government's call for evidence on the VAT threshold, which ran from 13 March to 5 June 2018.
Other policy solutions suggested in the consultation include a "smoothing mechanism", which would introduce the tax more gradually.
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 business to thrive, expand and further increase the overwhelming value they provide."
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