HM Revenue & Customs figures indicate that thousands of small firms may be deliberately limiting expansion to avoid crossing the UK’s £90,000 VAT registration threshold, fuelling renewed calls for reform of what critics describe as a “cliff-edge” tax system.
The data shows that 683,700 businesses reported turnover below the VAT threshold in the year to December 2025, up from 671,000 the previous year. Over the same period, the number of firms reporting turnover between £90,000 and £150,000 fell sharply to 280,400 from 306,300.
Accountancy firm Lubbock Fine said the shift suggested that some companies were consciously managing revenues to remain under the threshold, rather than expanding into the next trading bracket where VAT registration becomes mandatory.
Under current rules, once a business exceeds £90,000 in taxable turnover, it must register for VAT and charge 20 per cent on most goods and services. Registration also brings quarterly reporting requirements and compliance costs, often requiring specialist accounting support.
For many microbusinesses operating on tight margins, particularly in hospitality, retail and trades, the threshold can represent a sudden jump in both administrative burden and pricing pressure. Adding VAT can make services less competitive against smaller, non-registered rivals.
Industry advisers say that to remain below the limit, some cafés and shops are reducing opening hours or closing on quieter days. Tradespeople are reportedly capping workloads or switching to four-day weeks. Others are restructuring operations, a practice known as “business splitting”, where activities are separated into distinct legal entities to keep reported turnover below the threshold.
The issue has drawn political attention. In February, the House of Commons business and trade committee warned that the VAT threshold was “actively discouraging” firms from growing, particularly in labour-intensive sectors where margins are thin. Although the threshold was raised in 2024 for the first time in seven years, critics argue it has failed to address underlying distortions.
There is little agreement on how best to reform the system. The Resolution Foundation has suggested lowering the threshold to around £30,000, arguing this would smooth distortions and raise an estimated £2 billion annually for the Treasury. However, business groups counter that such a move would drag many microbusinesses into compliance regimes they are ill-equipped to handle.
Jaspal Dhillon, VAT partner at Lubbock Fine, said the threshold should instead rise to £115,000 in line with inflation. “It would ensure the administrative and cost burden of VAT falls on businesses with the scale and cashflow to absorb it, rather than holding back smaller firms at the point they are trying to grow,” he said.
The debate comes as small and medium-sized enterprises continue to navigate higher employment costs, energy prices and subdued consumer demand. Economists expect the issue to feature in wider discussions about productivity and growth strategy ahead of upcoming fiscal announcements.
