Are Small UK Businesses Holding Back Growth To Stay Under The £90,000 VAT Threshold?

Fresh HMRC figures have reignited an old VAT debate: whether the UK’s compulsory VAT registration threshold is creating a “cliff edge” that nudges small firms to stay small. In the year to December 2025, 683,700 businesses reported turnover below the £90,000 VAT threshold, up from 671,000 a year earlier. Over the same period, the number in the £90,000 to £150,000 bracket fell to 280,400 from 306,300.

This pattern can look like “bunching” around the threshold, especially in price-sensitive, labour-heavy sectors like hospitality, personal services and trades. A recent Business and Trade Committee report also warned the VAT threshold can discourage expansion and that cliff edges penalise firms that try to grow.

Why this matters for small businesses

VAT is not just a tax rate. It is a pricing decision, a cash flow issue, and an admin commitment.

Once you register, you generally need to:

• charge VAT on most standard-rated sales (often 20%)
• file VAT returns (usually quarterly)
• keep VAT records and follow VAT rules on invoices, evidence, and adjustments

For firms selling mainly to the public (who cannot reclaim VAT), adding VAT can feel like an overnight price jump. For firms selling mainly to VAT-registered businesses, registration can be neutral or even helpful, because customers can often reclaim VAT and you can reclaim VAT on your costs.

The £90,000 VAT threshold: what the rules actually say

The VAT registration threshold increased from £85,000 to £90,000 from 1 April 2024.

The two tests that trigger VAT registration

You must register if either applies:

Test	What HMRC looks at	What happens
Past turnover test	Taxable turnover in the last 12 months goes over £90,000 (rolling, not tax year)	Register within 30 days of the end of the month you went over
Future turnover test	You expect taxable turnover to go over £90,000 in the next 30 days alone	Register immediately for that expected breach

Key point: it is a rolling 12-month calculation, not “your year end” and not “the tax year”.

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What counts as “taxable turnover”?

HMRC focuses on taxable supplies, which generally include standard-rated, reduced-rated, and zero-rated sales. Exempt and out-of-scope income is treated differently, which is where many small businesses slip up.

Why businesses may cluster below £90,000

The incentive is simple: staying unregistered can keep pricing simpler and admin lighter. But it can also cap momentum.

Common behaviours advisers report include:

• turning away work late in the year to avoid breaching the line
• reducing hours or pausing marketing during busy periods
• delaying invoicing (which can be risky if it does not reflect the true tax point)
• changing customer mix, focusing on zero-rated or VAT-friendly work where possible
• restructuring activities into separate legal entities

That last point is the most dangerous if done mainly to sidestep VAT.

“Business splitting” and disaggregation risk

Splitting a business into multiple entities is not automatically illegal. But if it is an artificial separation, HMRC can treat the activities as a single taxable person for VAT. HMRC has detailed guidance on identifying when separate businesses are, in reality, one entity.

Practical ways to handle the VAT step-up without stalling growth

1) Price and margin planning (before you register)

• model what happens if you add VAT to prices versus absorbing part of VAT in margin
• review competitors: are they VAT-registered or not
• check whether your customers can reclaim VAT (B2B often can, consumers cannot)

2) Consider VAT schemes that help admin or cash flow

Some schemes are designed to reduce friction:

Scheme	Why firms use it	Key threshold
Flat Rate Scheme	Simpler VAT calculation in some cases	Join if VAT turnover is £150,000 or less
Cash Accounting Scheme	Pay VAT when customers pay you, helpful for slow payers	Join if taxable turnover is £1.35m or less

These are not right for every business, but they can ease the transition for some.

3) Improve record-keeping and invoicing controls

• keep clear evidence for VAT invoices and receipts
• set up bookkeeping so VAT codes are consistent
• avoid last-minute fixes that create errors and rework

What reforms are being discussed?

There is no consensus. The Business and Trade Committee has urged reform to address growth-discouraging cliff edges. Meanwhile, the Resolution Foundation has argued for a much lower threshold (around £30,000) to reduce distortions and raise revenue.

Others argue the opposite: raise the threshold so that only firms with more scale face compulsory registration (one proposal reported was £115,000).

A realistic outcome may involve reviewing how the cliff edge works, not just the number.

How We Help Small Businesses Navigate VAT

At Apex Accountants & Tax Advisors, we help growing businesses make VAT decisions based on numbers, not fear. Our VAT support typically covers:

• VAT threshold monitoring and registration planning
• pricing and margin reviews to reduce VAT shock
• VAT return compliance and error checks
• advice on suitable VAT schemes (where eligible)
• risk reviews around disaggregation and trading structures, aligned with HMRC guidance

If you would like guidance on managing VAT thresholds or reviewing your VAT position, contact Apex Accountants or book a consultation with our team today.

Conclusion

The latest HMRC figures and parliamentary scrutiny suggest the £90,000 threshold still shapes behaviour. For some firms, holding turnover below the line may feel safer in the short term, but it can also limit long-term value. The better approach is to treat VAT as a planned transition, with proper tracking, pricing decisions, and systems that keep compliance tight while growth continues.

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Call Anytime 0203 883 4777

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FAQs

1. Do I have to register for VAT the moment my turnover reaches £90,000?

No. You must register when your taxable turnover exceeds £90,000 over any rolling 12-month period. Once the threshold is breached, you normally have 30 days from the end of that month to notify HMRC and complete VAT registration.

2. How can I correctly track the rolling 12-month VAT threshold?

Businesses should review their total taxable sales at the end of every month. Add together turnover for the previous 12 months, not the tax year. Accounting software or spreadsheets can help monitor the threshold and avoid accidental breaches.

3. What happens if my business goes over the VAT threshold accidentally?

If your turnover exceeds £90,000 and you fail to register on time, HMRC may still require registration from the correct effective date. You may have to pay VAT owed on earlier sales and could face late registration penalties.

4. Is voluntary VAT registration ever beneficial for small businesses?

Yes, voluntary VAT registration can be beneficial in some cases. Businesses that incur significant VAT on expenses or mainly serve VAT-registered customers may benefit because they can reclaim input VAT and appear more established to larger clients.