A higher VAT threshold: what it means for growing businesses

The UK currently has one of the highest VAT registration thresholds in the world at £90,000. This means businesses only need to register for VAT once their taxable turnover exceeds that amount in a rolling 12-month period. However, there’s growing speculation that the government could raise the threshold even further — possibly to £100,000 — in an effort to reduce administrative burdens and encourage growth.

So, what would this mean for businesses on the cusp of VAT registration? Let’s break it down.

Why raise the VAT threshold?

The UK’s high VAT threshold is unusual compared to other countries. While it reduces compliance for smaller businesses, it also creates a cliff edge — many businesses deliberately limit their turnover to avoid crossing the line and dealing with VAT obligations. This “bunching” effect is estimated to cost the Treasury hundreds of millions in lost revenue each year.

Increasing the threshold to £100,000 could:

• Remove thousands of businesses from the VAT regime
• Reduce HMRC’s administrative workload
• Give small businesses more room to grow without worrying about VAT compliance

What would change for businesses?

If the threshold rises to £100,000:

• Fewer businesses would need to register for VAT

Those with turnover between £90,000 and £100,000 could remain outside the VAT system, avoiding quarterly returns and digital record-keeping requirements.

• Potential deregistration for some businesses

Companies currently registered but earning under £100,000 could choose to deregister, simplifying their processes and possibly improving cash flow.

• Impact on pricing and margins

Businesses selling to consumers might lower prices or increase profit margins without VAT obligations. However, those selling to VAT-registered businesses may lose the ability to reclaim input VAT, which could affect costs.

Pros and cons of a higher threshold

Pros:

• Less admin for small businesses
• Encourages growth beyond the current £90,000 limit
• Reduces HMRC’s workload

Cons:

• Potential loss of VAT revenue for the Treasury
• Businesses that deregister may face higher costs if they can’t reclaim VAT on purchases
• Could create new “bunching” at the £100,000 mark

What should growing businesses do now?

If your turnover is close to £90,000, keep an eye on the Autumn Budget announcements. In the meantime:

• Review your growth plans – Would a higher threshold change your pricing or expansion strategy?
• Speak to your accountant – They can help you model the impact of deregistration or continued VAT compliance.
• Stay informed – Budget changes can happen quickly, so make sure you’re ready to adapt.

A higher VAT threshold could be a game-changer for small businesses, reducing compliance costs and encouraging growth. But it’s not without trade-offs. Whether the government opts for £100,000 or sticks with the current level, planning ahead is key.