Why the VAT registration threshold is a problem for small businesses

Crossing the £90,000 VAT registration threshold can result in a sudden increase in administration and costs, especially for sole traders and small companies who are just under that figure.

Some businesses deliberately choose to limit their income to avoid having to register for VAT altogether, as this can lead to increased administrative work and pricing issues, especially if they have to pass the costs on to their customers.

Here, we look at why the threshold causes problems, what expert changes have been suggested in the past, and what you should do if you’re nearing the £90,000 ‘cliff edge’.

Importantly, no changes to VAT thresholds were announced at the 26th November 2025 Budget.

What is the VAT registration threshold?

If your taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT with HMRC.

You can also register voluntarily before your turnover reaches this level – if it suits the way you run your business.

This registration limit was increased from £85,000 in April 2024, following many years of being frozen.

You can find out exactly what to do in our guide to VAT registration for small businesses.

Once your business is VAT-registered, you need to:

• Charge VAT (typically 20%) on your sales and include VAT on invoices.
• Submit online VAT returns to HMRC, usually every quarter.
• Keep digital records using software that complies with the Making Tax Digital (MTD) rules (more on that here).

For larger firms or those that primarily sell to other businesses, becoming VAT-registered isn’t usually an issue.

But for sole traders who work directly with the public, or other small firms, becoming registered can become a real problem – particularly when it comes to increasing prices (when the alternative may be reducing your profitability).

The problem: the ‘cliff edge’ effect

The VAT threshold does not include a phase-in period or tapering. The moment your turnover crosses the threshold, you must register your business for VAT, regardless of whether it’s by £5,000 or just £5.

This sharp transition is often referred to as the “cliff edge”.

Once you cross the threshold, businesses must:

• Increase their prices to include VAT, which may make them less competitive.
• Absorb the VAT cost themselves, which will decrease profits.

This is why so many sole traders aim to stay just under the £90,000 mark.

According to research shared by AAT, some accountants reported that clients deliberately cut their hours or turned down work as they neared the limit.

“A plumber client now skips work on Fridays to avoid having to register for VAT.”

How common is this behaviour?

This isn’t just anecdotal. HMRC commissioned a detailed study into VAT registration behaviour in 2024, and the findings confirmed that many businesses are actively managing their income to avoid crossing the threshold.

According to the government’s report:

• Over 20% of businesses surveyed said they had turned down work to avoid registration.
• Some chose to take unpaid holidays or shut down temporarily near the threshold.
• Others reported they had decided not to expand at all due to the perceived burden of dealing with VAT.

One sole trader summed it up during a research interview:

“It just all seems negative. If I register for VAT, I’m more expensive than others and there’s more paperwork. It just sounds like an absolute headache.”

Is the threshold too high or too low?

This remains a point of debate. The UK has one of the highest VAT registration thresholds in the world. Most OECD countries set their thresholds as low as £20,000 in equivalent terms.

Writing for the Institute of Chartered Accountants in England and Wales (ICAEW), tax policy expert Anita Monteith said:

“There are two clear camps. Some want the threshold raised to help businesses grow. Others think lowering it would remove the distortion that encourages artificial turnover suppression.”

ICAEW has also noted that more than 75% of all VAT revenue comes from very large businesses with turnover above £10 million.

If the government raises the threshold for small firms, this would have a limited impact on the Treasury but could relieve pressure on thousands of sole traders.

Why hasn’t the system been reformed?

Despite several reviews over the years, no significant changes have ever been implemented.

The OTS (since disbanded) proposed several options, including:

• A gradual taper rather than an all-or-nothing trigger.
• Temporary reliefs for first-time registrants.
• A tiered system based on customer type (B2B vs B2C).

None of these proposals were taken forward. In a 2025 Parliamentary debate, MPs again raised concerns about the threshold acting as a disincentive for growth, particularly in regional and rural economies.

Practical tips if you’re nearing the threshold

If your business is approaching the VAT threshold, it’s important not to get caught off guard. Even a single one-off contract or seasonal spike in income could push you over the limit if you’re close to it already.

Here are some practical steps:

• Monitor your rolling 12-month turnover regularly.
• Use digital bookkeeping software to keep accurate records – you’ll know at a glance what your turnover is.
• Speak to an accountant well before you approach the £90,000 threshold.

In some cases, registering voluntarily can actually help, particularly if your clients are VAT-registered and can reclaim it.

Others may find it reduces margin or pricing flexibility. Either way, it’s a decision that needs proper planning.

For a full breakdown of how VAT works for sole traders, read our complete VAT guide.