It is one of the most perverse incentives in the British tax system, and HMRC’s own data now confirms what accountants and small business owners have been saying for years: thousands of firms are deliberately holding back growth to avoid crossing the £90,000 VAT registration threshold.
The numbers are striking. In the year to December 2025, 683,700 businesses reported turnover below the threshold, up from 671,000 a year earlier. Over the same period, the number of firms in the £90,000 to £150,000 bracket fell to 280,400 from 306,300. The bunching effect just below the line is unmistakable.
The reason is simple arithmetic. A sole trader or small business that crosses the £90,000 threshold must register for VAT and begin charging 20 per cent on top of their prices. For a business selling to consumers who cannot reclaim the tax, that either means a sudden price hike that risks losing customers, or absorbing the VAT and accepting a sharp cut to margins. Either way, the jump from £89,999 to £90,001 in turnover can leave a business materially worse off, a cliff edge that punishes growth rather than rewarding it.
The behavioural consequences are playing out across the economy in ways that should alarm policymakers. Industry advisers report that cafés and shops are reducing opening hours or closing on quieter days. Tradespeople are capping their workload or switching to four-day weeks. Some businesses are engaging in “business splitting”, separating activities into distinct legal entities to keep each one below the threshold.
None of this is illegal, but all of it represents productive capacity being left on the table. A plumber who could take on two more jobs a week is deliberately turning them down. A bakery that could open on Sundays is keeping its shutters down. A growing consultancy is declining new clients rather than crossing the line. In aggregate, the effect on employment, output and tax receipts is substantial, and entirely self-inflicted by a system that creates a penalty for success.
The House of Commons business and trade committee weighed in during February, warning that the threshold was “actively discouraging” firms from growing, particularly in labour-intensive sectors where margins are already thin. MPs called for reform, but no concrete proposal has yet emerged from the Treasury.
The policy options are well understood. A smoothing mechanism, gradually phasing in the VAT charge above the threshold rather than imposing it as a cliff edge, would remove much of the disincentive. Raising the threshold itself would take more businesses out of the system entirely, though at a cost to the Exchequer. A flat-rate scheme for the smallest firms already exists but is too complex and too poorly understood to solve the problem at scale.
For now, the choice facing tens of thousands of small business owners remains the same: grow and accept a sudden tax hit, or stay small by design. It is a choice that no sensible tax system should force, and until the Treasury acts, it will continue to hold back precisely the entrepreneurial energy that the government claims to want to unleash.
