The UK’s entrepreneurs make an important contribution to employment, economic activity and government revenues. Yet for some small businesses, the VAT registration threshold creates a powerful incentive to limit growth.
The current registration threshold is £90,000 of taxable turnover. Broadly, registration becomes compulsory when taxable turnover exceeds that figure over a rolling 12-month period, tested at the end of each month. There is also a separate test where taxable turnover is expected to exceed £90,000 in the next 30 days alone. It is not simply a test applied at the end of the accounting year.
For a business approaching this threshold, one question matters particularly: can its customers recover the VAT?
1. The customer’s position changes the economics
Suppose two businesses quote for the same job:
| Supplier | Quotation | Cost to a customer who cannot recover VAT |
|---|---|---|
| Not VAT registered | £100 | £100 |
| VAT registered | £100 plus 20% VAT | £120 |
If quality, reliability and the other relevant considerations are equal, the customer has an obvious financial reason to choose the £100 quotation.
For a business customer entitled to recover the VAT in full, the comparison is different. The £120 payment includes £20 recoverable VAT, leaving an effective cost of £100, although payment and recovery timing can affect cash flow.
The distinction is therefore not simply between private customers and businesses. Some business customers cannot recover VAT, or can recover only part of it. What matters is the customer’s actual recovery entitlement.
2. Your competitors matter too
Your competitors’ VAT position also matters. If most competing businesses are VAT registered, registration puts you on a similar footing: everyone must account for VAT within the prices customers pay.
However, remaining below the registration threshold can give a business a significant pricing advantage, particularly where customers cannot recover VAT. Hairdressers and beauticians are good examples.
For a standard-rated treatment, a registered competitor charging £120 retains £100 before costs and accounts for £20 output VAT. An unregistered business could charge £110, offer the customer a lower price and retain more before costs—although it cannot recover VAT on its purchases.
Being below the threshold therefore provides room to offer lower prices, earn a better margin, or combine the two. Whether that advantage outweighs the opportunities from growing beyond the threshold depends on the business’s customers, competitors and costs.
3. What happens if the trader cannot increase prices?
A trader selling to customers who cannot recover VAT may find it difficult to add 20% to existing prices.
If the customer will still pay only £100, that £100 must now include VAT:
| Breakdown of the customer’s £100 payment | Amount |
|---|---|
| Sale excluding VAT | £83.33 |
| VAT | £16.67 |
| Total paid | £100.00 |
At the standard 20% rate, VAT represents one-sixth of the VAT-inclusive price. Before allowing for recoverable VAT on purchases, the business therefore loses one-sixth of its previous receipts.
4. Why the required increase is 20%, rather than one-sixth
Consider a business receiving £90,000 annually, with negligible variable costs. It has fixed overheads, but these do not increase as more work is undertaken. Initially, assume those overheads provide no recoverable input VAT.
This is a comparison of ongoing annual trading positions, rather than a calculation of the VAT due in the year registration first takes effect. Customer receipts include VAT once registered; accounting turnover then excludes that VAT.
| Annual position | Before registration | Registered, same receipts | Registered, original return restored |
|---|---|---|---|
| Customer receipts | £90,000 | £90,000 | £108,000 |
| Output VAT | £0 | £15,000 | £18,000 |
| Revenue remaining before overheads | £90,000 | £75,000 | £90,000 |
The required calculation is: £90,000 ÷ 5/6 = £108,000.
The trader must increase receipts by £18,000, or 20%, to retain the original £90,000 before overheads. Increasing receipts to £105,000 would leave only £87,500 after output VAT.
If prices and the mix of work remain unchanged, 20% more receipts means approximately 20% more work. For someone already working at full capacity, that may be a substantial obstacle.
5. Variable costs can make the hurdle higher
The calculation becomes more demanding where additional work brings additional costs on which there is no recoverable VAT—for example, employee wages.
Suppose variable costs represent 30% of customer receipts, and fixed overheads remain unchanged:
| Calculation | Before registration | Registered, original contribution restored |
|---|---|---|
| Customer receipts | £90,000 | £118,125 |
| Output VAT | £0 | £19,687.50 |
| Variable costs: 30% of receipts | £27,000 | £35,437.50 |
| Amount remaining before fixed overheads | £63,000 | £63,000 |
After registration, each £1 received leaves: £1 − £0.166667 VAT − £0.30 variable costs = approximately £0.533333.
To preserve the previous £63,000 contribution: £63,000 ÷ (5/6 − 0.30) = £118,125.
Required receipts have increased by 31.25%, rather than 20%. This assumes sufficient capacity to undertake the extra work without increasing fixed overheads.
6. Recoverable input VAT changes the answer
It would be misleading to assume that every business simply loses one-sixth of its receipts. A registered business making taxable supplies can normally recover eligible VAT on its business purchases, subject to the usual conditions. This can reduce the impact of registration.
For example, suppose the £27,000 variable costs above consist entirely of purchases carrying 20% VAT, fully recoverable after registration. Their effective cost falls from £27,000 to £22,500 at the original activity level.
If those purchases continue to rise proportionately with activity, customer receipts of £108,000 would restore the original £63,000 contribution:
£108,000 ÷ 1.20 − £32,400 ÷ 1.20 = £90,000 − £27,000 = £63,000.
The required increase is then 20%. Recoverable VAT on existing fixed overheads can reduce the hurdle further. Conversely, extra staff, higher software licence charges or additional premises can increase it. The calculation must reflect the business’s actual costs and margins.
7. What about customers buying materials directly?
Some builders and other tradespeople arrange for customers to buy materials directly from the supplier, while the trader charges for the work. Where the customer genuinely buys the materials in their own right, those purchases do not form part of the trader’s sales. The customer may also welcome seeing the supplier’s price directly.
However, the contractual arrangement must match what actually happens. Having the customer pay a bill does not automatically remove it from the trader’s turnover if the trader is the person buying and supplying the materials.
Similarly, describing a recharge as a “disbursement” does not make it one. HMRC sets specific conditions for payments made as a customer’s agent.
8. Could increasing prices mean doing less work?
There is another possibility which may initially seem counterintuitive: increasing prices while accepting fewer jobs.
A higher price does not necessarily produce higher total turnover. Some customers may decline the quotation. If the remaining work generates the same income from fewer jobs, the owner may achieve a better return on their time while remaining below the registration threshold.
For example, 900 jobs at £100 produce £90,000. So do 750 jobs at £120. Before considering differences in costs, the same receipts have been earned from fewer jobs.
This is a commercial possibility, not a guaranteed outcome. Demand may fall too far, or remain strong enough that turnover still exceeds the threshold. A price rise does not remove the obligation to monitor turnover and register when required.
9. The decision needs a business calculation
For an owner approaching the threshold, the useful questions are:
- Can customers recover VAT?
- Are competing businesses VAT registered, and what prices do they charge?
- How much of a price increase will the market accept?
- How much input VAT will become recoverable?
- What contribution does each additional job generate?
- Is there capacity to undertake the extra work?
- Will growth trigger additional overheads?
- Could better pricing produce a satisfactory income from fewer jobs?
VAT registration can support growth, particularly where customers recover VAT and the business has substantial recoverable input tax. But for a business selling mainly to customers who cannot recover VAT, crossing the threshold can mean considerably more work simply to preserve the existing profit.
The right decision needs to be based on the figures for that particular business.
Sources and calculation basis
Prepared 11 November 2026. Examples assume standard-rated sales at 20% and normal VAT accounting, rather than the Flat Rate Scheme. Profit comparisons are before Income Tax, Corporation Tax and National Insurance on the owner’s income.