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 adding VAT would mean increasing prices or reducing profit margins.
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.
The VAT registration threshold is £90,000. If your taxable turnover goes over this amount in any rolling 12-month period, you normally need to register for VAT. The threshold is based on taxable turnover, not profit.
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.
Taxable turnover is not the same as profit. It generally includes standard-rated, reduced-rated and zero-rated sales, while exempt supplies do not normally count towards the threshold.
You can find out exactly what to do in our guide to VAT registration for small businesses.
If you’re close to the threshold because of an unusually large contract, see our guide to what happens if a one-off large job takes you over the VAT threshold.
Once your business is VAT-registered, you need to:
- Charge VAT at the appropriate rate on taxable sales, typically 20%.
- 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. Once your taxable turnover exceeds the threshold, you normally have a legal obligation to notify HMRC and register for VAT.
Under the rolling 12-month test, you normally need to notify HMRC within 30 days of the end of the month in which you exceeded the threshold. Your effective registration date will usually be the first day of the second month after you went over it.
The separate forward-looking test applies if you expect your taxable turnover to exceed £90,000 in the next 30 days.
There are limited circumstances where HMRC may grant an exception if the breach is temporary.
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 one reason some sole traders choose 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 has carried out research into how businesses behave around the VAT registration threshold.
A qualitative study published by HMRC in 2024, based on interviews carried out in 2022, found examples of businesses deliberately managing their turnover to avoid VAT registration.
The research included businesses that had turned down work, reduced trading activity or delayed growth because of concerns about VAT registration.
Because the study was based on qualitative interviews rather than a representative survey, its findings should not be treated as showing how common this behaviour is across all small businesses.
One business owner 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 among OECD countries, while many other countries operate significantly lower thresholds.
Some argue that raising the threshold would help small businesses grow without facing the VAT cliff edge. Others argue that a lower threshold could reduce the incentive for businesses to suppress turnover.
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.
If you’ve already gone over the limit without realising, see our guide to what happens if you accidentally exceed the VAT threshold.
And if you’ve registered but HMRC hasn’t yet issued your VAT number, read how to deal with VAT while you’re waiting for your VAT number.
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.