Figures from HM Revenue & Customs suggest thousands of small businesses may be deliberately limiting their expansion to avoid exceeding the UK’s £90,000 VAT threshold, sparking renewed calls for reform of what critics call a “cliff edge” tax system.
The data shows that 683,700 businesses reported sales below the VAT threshold in the year to December 2025, up from 671,000 the previous year. Over the same period, the number of companies reporting sales between £90,000 and £150,000 fell sharply, from 306,300 to 280,400.
Accounting firm Lubbock Fine said the shift suggested some companies were deliberately managing their revenues to stay below the threshold rather than expanding into the next class of trade where VAT registration becomes mandatory.
Under current rules, once taxable turnover exceeds £90,000, a business must register for VAT and charge a rate of 20 per cent on most goods and services. Registration also comes with quarterly reporting requirements and compliance costs, which often require specialized accounting support.
For many micro-enterprises operating on thin margins, particularly in the hospitality, retail and trade sectors, the threshold may mean a sudden increase in both administrative burdens and pricing pressures. The addition of VAT can make services less competitive compared to smaller, unregistered competitors.
Industry consultants say to stay below the limit, some cafes and shops are shortening their opening hours or closing on quieter days. Tradesmen are reportedly limiting their workloads or switching to four-day weeks. Others involve restructuring measures, a practice known as “business splitting,” in which activities are divided into different legal entities to keep reported sales below the threshold.
The issue has attracted political attention. In February, the House of Commons Business and Trade Committee warned that the VAT threshold was “actively discouraging” businesses from growing, particularly in labour-intensive, low-margin sectors. Although the threshold was raised in 2024 for the first time in seven years, critics argue that this has not addressed underlying distortions.
There is little agreement on how best to reform the system. The Resolution Foundation has proposed lowering the threshold to around £30,000, saying this would smooth out distortions and bring in an estimated £2 billion a year for the Treasury. But business groups counter that such a move would drag many small businesses into compliance regulations for which they are ill-equipped.
Jaspal Dhillon, VAT partner at Lubbock Fine, said the threshold should instead be raised to £115,000 in line with inflation. “It would ensure the administrative and cost burden of VAT falls on businesses that have the size and cash flow to absorb it, rather than hampering smaller businesses at the point where they want to grow,” he said.
The debate comes as small and medium-sized businesses continue to struggle with higher employment costs, energy prices and subdued consumer demand. Economists expect the issue to be addressed in broader discussions about productivity and growth strategy ahead of upcoming financial announcements.
