UK small businesses are holding back growth to avoid registering for VAT

For small businesses in the UK, hitting the value-added tax (VAT) threshold can be a sign of growth, but it also brings in extra costs, more admin, and tougher pricing decisions.

In April 2024, the Government increased the threshold for VAT registration from £85,000 to £90,000. 

However, despite this increase being made to reduce the administrative and tax burdens for smaller firms, new data seems to show that a large number of SMEs are limiting their growth to stay under the threshold.

But while limiting growth to avoid VAT obligations may save profits in the short term, it can ultimately stunt long-term expansion, prevent further investment, and hold businesses back from reaching their full potential.

Why are businesses sacrificing growth to avoid VAT?

There are 2.73 million VAT-registered companies in the UK (as of March 2025), while VAT receipts reached £171bn between 2024 and 2025. However, new HMRC data suggests SMEs might be limiting growth to avoid adding to that. 

In the year to December 2025, the number of businesses reporting turnover below the £90K threshold increased to 683,700 – up from 671,000 the previous year. Conversely, the number of firms with turnover between £90K-£150K dropped significantly, falling from 306,300 to 280,400.

Andrew Markou, co-owner and CEO of BusinessForSale.com, argues that the VAT threshold is creating a growth “cliff edge”, where very similar businesses can face significantly different costs just because one has slightly higher turnover.

“A sole trader turning over £89,000 and one turning over £95,000 face very different cost bases, even though their businesses may be almost identical in size,” he explains.

Unlike most taxes that rise gradually as income increases, VAT registration is required as soon as taxable turnover goes over the threshold in any rolling 12-month period, and businesses must then charge VAT on their sales. 

While business-to-business (B2B) customers can reclaim VAT, companies that sell directly to consumers may have to raise their prices to make up for the extra cost.

The risks of curbing growth to avoid VAT

Limiting revenue to stay under the VAT threshold can seem like a sensible decision. After all, it protects profit margins, avoids raising prices for customers, and keeps paperwork simple. 

The risks shouldn’t be ignored either, however. Holding back sales to stay under the threshold means businesses could miss out on bigger contracts, new clients, or market expansion. Other limitations include restricting investments in staff, equipment or marketing, which can limit long-term profits.

Additionally, if competitors are VAT-registered, they might appear more professional or be able to reclaim VAT on purchases. Some customers, particularly B2B clients, prefer working with VAT-registered firms for tax reclaim purposes, so not being registered could make a business seem even less established.

“Deliberately limiting your turnover is a defensive move, and defensive moves have a habit of becoming permanent.” Markou adds.

 “What starts as a pragmatic decision to protect cash flow can quietly become a ceiling on ambition. Three years later, the business is in the same position, and the owner is no closer to building something they could eventually sell.”

Growing beyond the threshold without hurting margins

For many business owners, the VAT threshold creates a point where even a small bump in turnover can suddenly change the picture. And, with 73% of UK businesses failing due to cash flow problems, it’s easy to see why many founders are afraid of growth.

However, there are several practices businesses can take to allow themselves to grow while protecting their margins. This includes value-based pricing (charging according to the value you provide, not just costs), upselling and cross-selling (encouraging customers to buy complementary products or premium versions), and focusing on products that make the most profit. 

Moreover, strong branding and building customer loyalty can help businesses maintain steady sales, charge fair prices – in turn making it easier for smaller firms to expand without getting tripped up by the VAT threshold.

Markou also advises that businesses reaching the threshold should carry out detailed financial modelling well in advance. They should also have a good understanding of how VAT registration will impact pricing, margins, and customer relationships.

“A carefully considered price adjustment, made ahead of the threshold, can absorb much of the impact without significant customer loss,” he adds.

“The goal should always be to build a business with scale, transferable value, and options. Crossing the VAT threshold is not the end of the margin; with the right planning, it can be the beginning of something considerably more valuable.”