UK VAT Threshold Stifles Growth: Small Businesses Choose to Stay Small

British entrepreneurs are making a calculation that would seem absurd in any other context: they're choosing to stay small. Not because of market conditions, competitive pressure, or lack of ambition, but because crossing an administrative threshold brings disproportionate costs. The VAT registration requirement at £90,000 has quietly become one of the most effective growth suppressors in the UK economy.

The arithmetic of staying small

The mechanism is straightforward. Once a business exceeds £90,000 in annual turnover, it must register for VAT, charge the tax on sales, and submit quarterly returns to HMRC. For many smaller operators, particularly those selling to consumers rather than VAT-registered businesses, this represents an effective 20 per cent price increase that customers must absorb.

What's more interesting here is the compliance burden. For a business turning over £95,000, the administrative cost of VAT registration—accounting software, professional advice, the time required for quarterly submissions—can easily consume several thousand pounds annually. That's before considering the cashflow implications of collecting tax on behalf of the Treasury, effectively providing HMRC with an interest-free loan on money that will eventually flow through to the government.

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Cafes and shops are deliberately reducing their trading hours or shutting on quieter days. B&Bs are closing for entire seasons rather than accepting winter bookings that might push them over the threshold.

The workarounds Lubbock Fine has identified reveal just how powerful this disincentive has become. Cafes and shops are deliberately reducing their trading hours or shutting on quieter days. B&Bs are closing for entire seasons rather than accepting winter bookings that might push them over the threshold. These aren't marginal adjustments. They're structural decisions to constrain revenue.

When avoidance becomes strategy

More sophisticated operators are splitting their businesses, separating different activities into multiple legal entities to keep each below the £90,000 mark. Whether HMRC views this as legitimate corporate structuring or artificial avoidance depends heavily on the specifics, but the practice itself signals how badly the threshold has distorted commercial decision-making.

Jaspal Dhillon, VAT partner at Lubbock Fine, argues that the government should lift the threshold to £115,000, which would reflect inflation since the figure was frozen at £85,000 in 2017. That seven-year freeze has meant the real value of the threshold eroded consistently, pulling more businesses into the VAT net simply because their nominal revenues rose with general price levels, not because they'd genuinely grown.

The government did move the threshold to £90,000 in 2024, a modest adjustment that barely made up lost ground. But even that 5.9 per cent increase lagged well behind cumulative inflation over the period. Businesses reaching the threshold today are, in real terms, considerably smaller than those hitting the same barrier a decade ago.

The Federation of Small Businesses has called for a more modest increase to £100,000, a figure that would ease the pressure without creating the step-change Lubbock Fine advocates. That the FSB's position is more conservative than an accounting firm's isn't without irony—Lubbock Fine has a commercial interest in more complex VAT work, after all. More businesses above the threshold means more advisory fees.

The productivity cost

A café that caps its turnover at £89,000 isn't just limiting its own potential revenue. It's not hiring the additional staff member who would allow longer opening hours. It's not investing in the equipment upgrade that would increase capacity.

The real economic damage isn't just about the 26,000 businesses that have effectively gone missing from the £90,000-£150,000 revenue band. It's about what those businesses might have become if the threshold incentive didn't exist. A café that caps its turnover at £89,000 isn't just limiting its own potential revenue. It's not hiring the additional staff member who would allow longer opening hours. It's not investing in the equipment upgrade that would increase capacity.

Multiply those decisions across thousands of businesses, and the aggregate effect on productivity and employment becomes material. The Treasury may collect VAT from those who do cross the threshold, but it's losing income tax, National Insurance, and economic activity from those who deliberately don't.

The freeze has also created a particularly perverse outcome for businesses that primarily serve consumers. A B2B operation can at least reclaim VAT on its inputs, softening the blow. But a retailer, therapist, or hospitality business selling to the public faces the full brunt. Their customers can't reclaim the VAT, so the business either absorbs the cost or raises prices and risks losing custom.

Fixing this doesn't require radical reform. An inflation-linked annual adjustment would prevent the threshold from eroding over time and remove the political sensitivity around periodic increases. The current system, where small businesses must second-guess whether this year's revenue growth will tip them over an arbitrary line, is precisely the kind of policy friction that damages competitiveness without delivering meaningful revenue.

Expect pressure to build. The gap between Lubbock Fine's £115,000 proposal and the FSB's £100,000 request isn't insurmountable, and both figures would represent pragmatic adjustments rather than wholesale change. What the HMRC data has made undeniable is that thousands of businesses are now organising their affairs around avoiding growth. That's a tax policy failure with consequences that extend far beyond the immediate VAT take.

More articles by Ross Williams