HM Income & Customs figures point out that 1000’s of small companies could also be intentionally limiting enlargement to keep away from crossing the UK’s £90,000 VAT registration threshold, fuelling renewed requires reform of what critics describe as a “cliff-edge” tax system.
The info exhibits that 683,700 companies reported turnover under the VAT threshold within the yr to December 2025, up from 671,000 the earlier yr. Over the identical interval, the variety of companies reporting turnover between £90,000 and £150,000 fell sharply to 280,400 from 306,300.
Accountancy agency Lubbock Tremendous stated the shift recommended that some firms had been consciously managing revenues to stay beneath the edge, moderately than increasing into the following buying and selling bracket the place VAT registration turns into necessary.
Beneath present guidelines, as soon as a enterprise exceeds £90,000 in taxable turnover, it should register for VAT and cost 20 per cent on most items and providers. Registration additionally brings quarterly reporting necessities and compliance prices, usually requiring specialist accounting assist.
For a lot of microbusinesses working on tight margins, significantly in hospitality, retail and trades, the edge can characterize a sudden bounce in each administrative burden and pricing stress. Including VAT could make providers much less aggressive towards smaller, non-registered rivals.
Business advisers say that to stay under the restrict, some cafés and retailers are lowering opening hours or closing on quieter days. Tradespeople are reportedly capping workloads or switching to four-day weeks. Others are restructuring operations, a follow generally known as “enterprise splitting”, the place actions are separated into distinct authorized entities to maintain reported turnover under the edge.
The problem has drawn political consideration. In February, the Home of Commons enterprise and commerce committee warned that the VAT threshold was “actively discouraging” companies from rising, significantly in labour-intensive sectors the place margins are skinny. Though the edge was raised in 2024 for the primary time in seven years, critics argue it has failed to deal with underlying distortions.
There’s little settlement on how finest to reform the system. The Decision Basis has recommended decreasing the edge to round £30,000, arguing this may easy distortions and lift an estimated £2 billion yearly for the Treasury. Nevertheless, enterprise teams counter that such a transfer would drag many microbusinesses into compliance regimes they’re ill-equipped to deal with.
Jaspal Dhillon, VAT companion at Lubbock Tremendous, stated the edge ought to as a substitute rise to £115,000 in keeping with inflation. “It could guarantee the executive and price burden of VAT falls on companies with the dimensions and cashflow to soak up it, moderately than holding again smaller companies on the level they’re making an attempt to develop,” he stated.
The controversy comes as small and medium-sized enterprises proceed to navigate increased employment prices, vitality costs and subdued shopper demand. Economists anticipate the problem to characteristic in wider discussions about productiveness and progress technique forward of upcoming fiscal bulletins.
