Thousands of businesses across the United Kingdom are deliberately constraining their expansion and revenue growth to remain below the critical £90,000 threshold at which firms must begin paying Value Added Tax (VAT). This strategic suppression of growth highlights a significant structural issue within the UK tax system, according to leading accounting experts.
Call for Inflation-Adjusted VAT Threshold Increase
City accounting firm Lubbock Fine has presented a compelling argument for the government to raise the VAT registration threshold to £115,000. This figure represents the level the threshold would have reached if it had been increased in line with inflation since 2017, rather than being frozen for an extended period.
The current VAT threshold was increased to £90,000 in 2024, up from the previous £85,000, where it had remained stagnant since 2017. This modest adjustment has failed to keep pace with economic pressures and inflation, creating a disincentive for small business growth.
Statistical Evidence of Growth Suppression
Analysis of HMRC data conducted by Lubbock Fine reveals a telling trend. At the end of last year, there were 683,700 firms earning under the £90,000 threshold, representing a 1.9 per cent increase from 671,100 businesses a year earlier.
Conversely, the number of businesses earning between £90,000 and £150,000 fell by a substantial 8.5 per cent over the same period, dropping from 306,300 to 280,400. This inverse relationship strongly suggests that businesses are actively managing their revenue to avoid crossing the VAT threshold.
VAT Threshold as a 'Clear Block on Growth'
"Raising the VAT threshold would remove a clear block on growth," emphasized Jaspal Dhillon, VAT Partner at Lubbock Fine. "It would ensure the administrative and cost burden of VAT falls on businesses with the scale and cashflow to absorb it, rather than holding back smaller firms at the point they are trying to grow."
The accounting firm suggests that small businesses are avoiding VAT registration primarily due to the significant bureaucracy involved in calculating and submitting VAT returns, coupled with the substantial costs associated with professional tax advice.
Deliberate Business Strategies to Avoid VAT
"Thousands of businesses are choosing to suppress growth rather than take on the tax and administrative burden of VAT registration and compliance," Dhillon explained. "Instead of expanding, firms are making decisions based on how to stay under an arbitrary limit."
Lubbock Fine has documented various tactics employed by businesses to remain below the threshold:
- Retail shops and cafes reducing operating hours or closing on traditionally quieter days
- Bed and breakfast establishments closing during winter months to keep annual revenue lower
- 'Business splitting' strategies, where companies separate different activities into multiple legal entities to artificially suppress reported revenue
Industry Calls for Budget Action
Ahead of the upcoming Budget announcement, the Federation for Small Businesses has added its voice to the growing chorus calling for threshold reform. The organization has specifically urged the Chancellor to raise the VAT registration threshold to at least £100,000 as an immediate measure to support small business growth.
The current system creates a perverse incentive where business owners must choose between expansion and avoiding additional tax burdens. This dynamic ultimately limits economic growth, reduces job creation, and stifles innovation within the small business sector that forms the backbone of the UK economy.
