Small Businesses Restrict Growth to Evade VAT Threshold

British small businesses are increasingly curbing their growth to avoid surpassing the £90,000 VAT threshold, recent data from HM Revenue & Customs (HMRC) suggests. The number of businesses earning beneath this tax threshold rose to 683,700 in the year ending December 2025, compared to 671,000 the prior year.

Conversely, the count of businesses generating between £90,000 and £150,000 in turnover decreased from 306,300 to 280,400. This trend indicates that many companies are intentionally limiting their expansion to sidestep the additional tax and regulatory obligations tied to VAT registration.

VAT, which is a 20 per cent tax on most goods and services in the UK, requires businesses to register upon exceeding the annual taxable turnover. Small and medium-sized enterprises are already facing challenges related to rising employment costs, escalating energy prices, and constrained consumer spending.

In an effort to stay below the VAT threshold, some enterprises, notably retail shops and cafes, have begun reducing their opening hours or closing on less busy days. Additionally, tradespeople are reportedly shifting to four-day working weeks as a strategy to limit reported turnover.

Some businesses have resorted to splitting operations into separate entities to manage their income and stay below the VAT threshold. This practice, also known as business splitting, has emerged as a tactical response to avoid the financial burdens associated with VAT compliance.

Calls for a review of the UK’s VAT threshold have intensified, with the business and trade committee highlighting its role in discouraging broader company expansion, particularly in labour-intensive sectors. While opinions differ on how to reform VAT, some experts suggest lowering the threshold to £30,000, arguing this would enhance government revenue.

Conversely, VAT specialists advocate for raising the threshold to £115,000 to reflect inflation. They argue this adjustment would better align tax burdens with businesses capable of managing the associated administrative and financial duties, thereby preventing undue constraints on smaller firms during growth phases.