- More businesses are clustering just below the £90,000 VAT threshold.
- Fewer firms are moving into the £90,000–£150,000 turnover bracket.
- Critics say the system may be discouraging growth.
The £90,000 VAT threshold is back under scrutiny after fresh HM Revenue & Customs figures suggested that thousands of small businesses may be holding back growth to avoid crossing it.
Data from HM Revenue & Customs shows that 683,700 businesses reported turnover below the £90,000 VAT registration threshold in the year to December 2025. That is up from 671,000 a year earlier. At the same time, the number of firms reporting turnover between £90,000 and £150,000 fell sharply to 280,400 from 306,300.
On paper, those shifts might look modest. But advisers say the pattern hints at something more deliberate — businesses appearing to cluster just under the VAT line rather than pushing into the next bracket.
The £90,000 cliff edge
Under current rules, once taxable turnover goes above £90,000, a business must register for VAT and charge 20 per cent on most goods and services. That also means quarterly reporting, extra paperwork and often the need to pay for specialist accounting support.
For a microbusiness running on tight margins, particularly in hospitality, retail or the trades, that step can feel sudden. Adding 20 per cent to prices risks making them less competitive against smaller rivals who are not VAT-registered.
Accountancy firm Lubbock Fine said the latest figures suggest some firms could be consciously managing their revenues to remain under the threshold rather than expanding. Industry advisers say cafés and shops sometimes cut opening hours or close on quieter days to keep turnover down. Tradespeople are reportedly limiting jobs or moving to four-day weeks. Others separate parts of their operations into different legal entities, a practice known as business splitting, to avoid breaching the limit.
None of this is illegal if structured correctly. But critics argue it shows how the design of the system may be shaping behaviour.
Reform row gathers pace
The debate has reached Westminster. 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. Although the threshold was lifted in 2024 for the first time in seven years, concerns appear to have persisted.
There is little agreement on what should happen next. The Resolution Foundation has suggested lowering the threshold to around £30,000, arguing that a broader base would smooth distortions and could raise about £2 billion annually for the Treasury. Business groups, however, say such a move would drag many microbusinesses into a compliance system they are not equipped to manage.
Jaspal Dhillon, VAT partner at Lubbock Fine, argued instead for raising the threshold to £115,000 in line with inflation. That would place the burden, he reportedly said, on businesses with the scale and cashflow to absorb it rather than those just beginning to grow.
The backdrop is hardly straightforward. Small and medium-sized enterprises are already navigating higher employment costs, rising energy bills and subdued consumer demand. Economists expect the VAT threshold to feature in wider discussions about productivity and growth strategy ahead of upcoming fiscal announcements.
For now, the numbers suggest one thing: when it comes to the £90,000 VAT threshold, many small firms may be choosing caution over expansion.
