The VAT Threshold Trap: Should I Grow or Stay Small?

A Factsheet from

Thousands of businesses are turning down work to avoid turning over too much.

Government wants businesses to grow and there is a view that growth is always good with more customers, bigger orders and higher turnover. For thousands of small business owners across the UK though, growing big enough to cross the VAT threshold is a step too far because of the additional admin it brings.

If your business turnover hits £90,000 in a 12-month rolling period, you’re legally obliged to register for VAT. That means charging 20% on most sales, filing extra returns, keeping detailed records, with often no choice but to hike prices to cover it.

For many micro firms serving individuals or the general public, it’s a cliff edge. One week you’re ticking along nicely. The next, you’ve priced yourself out of the market, because you’re having to charge a fifth more than the competition.

To avoid all that, too often small businesses cap their own growth. They turn down work. One shopkeeper told me she keeps a spreadsheet of daily takings and pulls back the moment she’s getting close. A children’s entertainer said they’d offering weekend parties. A sole trader builder passed jobs to a friend once he got to £88,000. This is nothing to do with not wanting to work, but they’ve done the calculation and feel hitting the £90,000 mark just isn’t worth it.

1. The jump from £90,000 to profitable post-VAT turnover is steep.
If you’re a dog groomer charging £45 a session and you register for VAT, you either raise your prices to £54 (and risk losing customers) or absorb the VAT—and slash your margin. Neither feels like a win. And to earn the same after VAT, you may need to turn over £110,000 or more—possibly doing 30% more work for the same reward.

2. Admin increases significantly.
VAT means quarterly filings, digital records, and potentially hours of extra admin every month. That’s time you’re not earning, creating or recovering. And for a one-person operation, that can tip the balance.

3. It skews the market.
Bigger businesses which are already VAT-registered don’t have to worry. They reclaim VAT on purchases and are used to the system. Any business buying goods on which VAT is applied can reclaim that amount if they’re VAT registered but micro businesses serving individuals usually don’t have much to reclaim on their purchases and their customers can’t reclaim the extra they have to pay if they decide to use a VAT registered supplier. Many will opt to work with a supplier who isn’t VAT registered. If you’re heading for that £90,000 threshold it can make sense to put the brakes on. The threshold is creating a two-tier system where smaller players feel they will be punished if they grow. .

So what can you do if you’re hovering near the line?

First, understand your numbers.
Look at your costs, margins, and customer base. Are they price-sensitive? Could you restructure your offer to include services that are zero-rated or exempt? Could you bundle or repackage what you do to make the VAT impact more manageable?

Second, get good advice.
Talk to an accountant who understands small business realities. There may be ways to smooth the transition or plan growth in stages. Voluntary registration at a time of your choosing (rather than a forced scramble) can sometimes be better in the long run.

Third, speak up.
The VAT threshold hasn’t kept pace with inflation. And it punishes precisely the kind of modest growth we need to encourage—especially in post-pandemic high streets and local economies. If we want small firms to scale, we need a tapered system that supports them through the jump.

Until then, too many talented entrepreneurs are holding back—stuck in the trap between staying small and becoming viable at scale.

Growing your business shouldn’t feel like walking into a tax penalty. It should feel like a step forward.

So if you’re near the line, don’t panic—but don’t bury your head either. Plan, prepare, and push for a system that lets small firms grow sustainably, not fearfully.

Because ambition shouldn’t come with a tax warning.

Register at http://www.business111.com for more factsheets By Liz Barclay