The high threshold reflects a longstanding policy decision to keep most small businesses out of the VAT system entirely. Whether that policy is the right call is a question both lobbied for and against, with credible arguments on each side. The debate has been live for years and continues to be.
- "High threshold = pro-small-business" isn't the consensus view. A high threshold protects very small firms from VAT compliance, but it can also discourage growth, distort competition, and reduce overall tax revenues. Whether the net effect helps or hurts small business is exactly what economists and policymakers disagree about.
- "Raise it to fix the cliff edge" and "lower it to fix the cliff edge" are both genuine policy positions. The bunching of businesses just below the threshold is well documented. What's contested is whether a higher threshold (more room to grow) or a lower one (smaller cliff) would address it better. The Tax Foundation and the IMF have argued for both lower thresholds and reform; the FSB and Reform Party have argued for higher.
- "Most countries have a lower threshold" is true but misleading. Different VAT systems treat small businesses differently, with simplified regimes, presumptive systems, and exemptions that change the practical impact of a "lower" threshold. Comparing nominal figures alone gives a partial picture.
- "The threshold should be inflation-linked" sounds obvious but isn't policy. The threshold has been adjusted in fits and starts rather than indexed. Had it been inflation-linked since 2017, it would now be over £100,000. The decision not to index is itself a policy stance, not an oversight.
- "It can't change much without a Budget" is mostly true, but not entirely. Major threshold changes typically come at fiscal events, but technical adjustments, scope changes, and related rules can shift at other points. Assuming the threshold is locked in until the next Budget can lead to surprises.
The figure in international context
The current UK VAT registration threshold is £90,000 of taxable turnover. By international standards, that's an outlier:
- OECD average: around £30,000
- UK: £90,000 (joint highest in the OECD, alongside Switzerland)
- Most EU member states: £20,000 to £40,000, with some operating no threshold at all for resident businesses (Spain, Italy)
- In purchasing power parity terms, the UK threshold is the third-highest in the OECD, behind only the Czech Republic and Italy
The gap is substantial. A UK business at £80,000 of turnover is outside the VAT system entirely. The same business in France, Germany, or the Netherlands would have crossed its national threshold long ago and be filing VAT returns.
How the UK ended up here
The high threshold isn't an accident. When VAT was introduced in the UK in 1973, replacing Purchase Tax, the registration threshold was set deliberately high relative to other European systems. The political logic was to spare the smallest businesses from a new tax system they had no prior experience with.
Successive governments have maintained that approach, broadly increasing the threshold in line with inflation through the 1980s, 1990s, and early 2000s. The figure crossed £50,000 in 1997, £70,000 in 2010, and £85,000 in 2017. It was then frozen at £85,000 for seven years until April 2024, when it was raised to £90,000 in the Spring Budget. It has held at £90,000 since.
Had the threshold been indexed to inflation continuously since 2017, it would now sit well above £100,000. The seven-year freeze means the real-terms threshold is lower today than it was a decade ago, even though the headline figure has gone up.
Why the threshold is kept high: the official case
The government's position, restated in Parliament as recently as the March 2026 Lords debate, rests on three main arguments:
1. Compliance cost is real for very small firms
VAT compliance involves quarterly digital returns under Making Tax Digital, detailed record-keeping, software costs, and the time spent classifying transactions correctly. For a business turning over £40,000, those costs represent a meaningful proportion of revenue. A high threshold removes that burden for the smallest operators.
2. Lost revenue from lower thresholds is modest
The smallest businesses generate proportionally little VAT revenue relative to their compliance burden. Lowering the threshold would bring in more revenue, but a substantial portion of that would be offset by HMRC's costs of administering many more taxpayers, and by the cost of compliance support for the businesses themselves.
3. Most small businesses welcome the protection
Survey evidence consistently shows that businesses below the threshold value being outside the VAT system. The simplicity, the absence of price impact on consumer customers, and the lack of compliance overhead are real benefits to firms operating in that range.
Why the threshold is criticised: the other side
The case against the current level comes from multiple directions and isn't always coherent in its conclusions:
1. The "cliff edge" discourages growth
A business at £85,000 of turnover faces a difficult choice as it approaches £90,000: register and effectively lose 20% of its margin (or raise prices and risk losing customers), or hold turnover artificially low to stay below the line.
The Federation of Small Businesses has lobbied for a higher threshold (£100,000 or more) to ease this cliff. Reform UK has called for raising it to £150,000.
2. The threshold creates competitive distortion
Two identical businesses, one at £88,000 and one at £92,000, end up in materially different commercial positions. The one above the threshold has to charge VAT (or absorb it). The one below doesn't. In sectors with many small operators (hair and beauty, hospitality, construction, certain professional services), this can create a sustained price advantage for the smaller firm.
3. The threshold makes the system less efficient
The Tax Foundation and several international bodies have argued the opposite of the FSB's position: that the UK should lower its threshold significantly, bringing more businesses into the VAT system and simplifying the rules around what's taxable. The economic argument is that a broader VAT base with fewer exemptions and a lower threshold would be more efficient than the current high-threshold, exemption-heavy structure.
4. Taper mechanisms have been proposed
Multiple parliamentary debates have raised the idea of a "taper" where VAT phases in gradually as a business grows from, say, £70,000 to £110,000, rather than triggering at a single line. The government has so far rejected this on the grounds that it would add complexity without strong evidence it would change bunching behaviour. Critics point out that the absence of bunching reduction isn't the only test of a taper's value.
Where this gets ambiguous: the policy debate doesn't lead to a single right answer, even among economists looking at the same data. The IMF, the OECD, the FSB, the Tax Foundation, the OBR, and successive UK governments have all reached different conclusions about what the threshold "should" be, often using overlapping evidence. The level isn't simply a question of arithmetic, it's a question of which trade-offs you accept.
VATthreshold.UK is our dedicated service for businesses navigating the £90,000 line: assessment, registration timing, and the strategy around it, whatever the threshold ends up being.
What might change, and when
Threshold changes typically come at major fiscal events, the Budget in the autumn and the Spring Statement. Between events, the figure tends to hold, although technical adjustments and scope changes can happen at other points.
As of mid-2026, no further change to the £90,000 level has been announced. The most recent fiscal event (the November 2025 Budget) confirmed the figure at its current level, and the March 2026 Parliamentary debate produced no immediate movement. That doesn't mean the figure is permanent, only that it's holding for the current period.
The lobbying pressure is heading in opposite directions simultaneously:
- Pressure to raise: the FSB lobbies for £100,000 or higher; Reform UK has called for £150,000
- Pressure to lower: the Tax Foundation argues for a substantial reduction; some Treasury officials have reportedly considered lowering the threshold to help close fiscal gaps; international bodies tend to favour broader VAT bases with lower thresholds
- Pressure to redesign: taper proposals, hybrid mechanisms, and sector-specific rules all surface periodically
Where the political balance lands at any future fiscal event will depend on the wider economic context, the revenue position, and the political appetite for the trade-offs involved. Anyone trying to predict the direction confidently is going beyond what the evidence supports.
What this means in practice if you're a business
For businesses operating in the UK, the policy debate has practical consequences, but only at the level of "what to plan for". Three things matter:
- Don't assume the threshold will rise. The fact that some lobbying is pushing for an increase doesn't make one likely. Plan around the current £90,000 line, monitor your turnover accordingly, and treat any future change as a bonus rather than a baseline assumption
- Don't assume the threshold will stay. The fact that it's currently at £90,000 doesn't mean it will remain there indefinitely. A future government, facing different fiscal constraints, could lower it. Businesses operating at, say, £55,000 of turnover today should be aware that this comfort zone isn't permanent
- The mechanics matter more than the level. Whatever the threshold turns out to be, the rolling 12-month test, the forward-look test, the classification of taxable turnover, and the consequences of late registration all stay the same. Understanding the system is more useful than predicting the figure
The situations that most often turn into costly mistakes
Most people reading about the threshold debate don't have an immediate business decision to make. But the situations below are where the broader policy context turns into a practical question, and where the cost of getting it wrong can be material:
- You're operating close to the current threshold and trying to decide whether to register now (voluntarily), wait for compulsory registration, or hold turnover below the line
- You're a journalist or researcher writing about the threshold and want a clear-eyed reading of the international comparison and the policy debate
- You're setting up a new UK business and want to understand how the threshold will likely affect your planning over the next few years
- You're established in a country with a much lower threshold and your UK business is approaching the line, and you want to think about whether voluntary registration earlier (familiar from your home market) makes sense
- You're an accountant or adviser helping clients position around the threshold and want a second specialist view on the practical implications
- You've read about proposed changes to the threshold and want to understand what they would actually mean for your business
Whether you're a business owner or an accountant working on a client case, we focus on the VAT questions where extra expertise pays off, and we work in plain English.