UK firms deliberately halting growth to dodge VAT
Thousands of businesses are deliberately constraining their growth to remain below the £90,000 threshold at which firms start paying VAT.
City accounting firm Lubbock Fine has argued that the government should raise the threshold to £115,000, the level it would be if it had increased in line with inflation since 2017.
The VAT threshold was increased to £90,000 in 2024, up from £85,000 previously, where it had been frozen since 2017.
According to the company’s analysis of HMRC data, there were 683,700 firms earning under the £90,000 threshold at the end of last year, up 1.9 per cent from 671,100 a year earlier.
The number of businesses earning between £90,000 and £150,000, meanwhile, fell 8.5 per cent over the same period, from 306,300 to 280,400.
VAT threshold ‘a clear block on growth’
“Raising the VAT threshold would remove a clear block on growth,” Jaspal Dhillon, VAT Partner at Lubbock Fine said.
“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.”
Lubbock Fine suggested that small businesses were avoiding registering for VAT due to the bureaucracy involved in calculating and submitting VAT returns, as well as the cost of advice.
The VAT threshold was increased to £90,000 in 2024, up from £85,000 previously, where it had been frozen since 2017.
“Thousands of businesses are choosing to suppress growth rather than take on the tax and administrative burden of VAT registration and compliance,” Dhillon said. “Instead of expanding, firms are making decisions based on how to stay under an arbitrary limit.”
Some shops and cafes were reducing opening hours or closing on quieter days, Lubbock Fine noted, while B&Bs were closing during winter months to keep revenue lower.
Some businesses were also engaged in ‘business splitting’, where they separate different activities into multiple entities in order to artificially suppress revenue.
Ahead of the Budget, the Federation for Small Businesses urged the Chancellor to raise the registration threshold to £100,000.