Small Businesses Limit Growth to Stay Below £90,000 VAT Threshold, HMRC Data Shows
A growing number of small businesses across the UK are deliberately limiting their expansion in order to remain below the VAT registration threshold, according to recent HM Revenue & Customs data reported by The Times. The figures indicate a noticeable clustering of companies with annual turnover just under £90,000, the point at which VAT registration becomes mandatory. At the same time, there has been a relative decline in the number of firms reporting revenues just above that threshold, suggesting that some microbusinesses may be actively managing their income to avoid crossing it.
The VAT registration threshold was raised to £90,000 in April 2024, with the deregistration threshold set at £88,000. Once a business exceeds the registration point, it must charge VAT at 20 per cent on most goods and services, submit quarterly returns, maintain digital records under Making Tax Digital requirements, and manage additional administrative obligations. For very small firms operating on tight margins, particularly in customer-facing sectors such as hospitality, personal services and construction trades, the shift can have a material impact on pricing structures and cash flow management. Absorbing VAT reduces margins, while passing it on to consumers can weaken competitiveness against non-registered rivals.
Economists have long observed what is sometimes referred to as a “cliff edge” effect in threshold-based tax systems. Instead of a gradual increase in tax liability as turnover grows, a single trigger point can create a sudden change in compliance costs and pricing dynamics. Data trends indicating a concentration of firms just below the threshold are often interpreted as evidence of behavioural responses to that structure rather than organic market outcomes. Some business advisers report that companies may reduce working hours, decline new contracts, or slow marketing activity in order to remain under the limit. In certain cases, firms restructure operations into separate legal entities, although such arrangements must comply with anti-avoidance rules.
From a policy perspective, the VAT threshold plays a dual role. It reduces the administrative burden on very small enterprises and HMRC alike, while also defining the boundary between microbusinesses and those operating at a more scalable commercial level. The UK’s threshold remains comparatively high by international standards, which shields many sole traders and micro-enterprises from compliance costs. However, the concentration effect suggests that the design of the system can influence growth decisions at the lower end of the market.
The broader economic context is also relevant. Small and medium-sized enterprises account for the vast majority of UK businesses and a substantial share of private sector employment. Encouraging sustainable growth among this group is central to long-term productivity and regional development objectives. Adjustments to thresholds, digital reporting systems and administrative processes are often framed as part of wider efforts to modernise the tax system while maintaining revenue stability. Any structural reform would need to balance simplicity, fairness and fiscal responsibility.
For SME readers, the immediate practical implications are clear. Approaching the £90,000 turnover mark requires advance planning, including pricing reviews, margin analysis and systems readiness for digital VAT reporting. While some firms may choose to remain below the threshold in the short term, others may conclude that registering and scaling beyond it offers stronger long-term prospects. The data suggest that the threshold continues to shape behaviour across the microbusiness landscape, making it a key operational consideration for thousands of small enterprises.
About the Author
This is Small and Medium Enterprises News Official News Desk