VAT bombshell for small firms?

Nigel Farage’s proposal to raise the VAT registration threshold from £90,000 to £150,000 could be one of the biggest shake-ups for small businesses in decades. Supporters say it would free thousands of firms from red tape, encourage growth and keep prices lower for customers. Critics warn it could create new market distortions, cost the Treasury billions and encourage businesses to stay small rather than scale. For Britain’s five million-plus small businesses, the debate goes right to the heart of how the economy should grow.

THE PROS AND CONS OF RAISING VAT

WHAT IF THE VAT THRESHOLD JUMPED TO £150,000?

Photo by John McArthur on Unsplash

Might this be the game‑changer small businesses have been begging for? Nigel Farage says that’s what he’ll do if he gets to be Prime Minister so what would it mean in reality?

Instead of hitting the VAT wall at £90,000, small businesses could grow all the way to £150,000 turnover before they have to register for, charge and pay VAT to HMRC.

For thousands of small and micro firms, that would be the biggest boost in decades and could transform the UK’s struggling economy from the bottom up.

SMALL BUSINESSES WOULD BE FREE TO GROW

Right now, the VAT threshold is a brick wall. Go £1 over £90k and suddenly:

• You must charge customers 20% more

• You face heavy admin

• You risk losing price‑sensitive customers

• You spend hours on compliance instead of earning

Many firms deliberately hold back growth, turn away work, or shut their books early to avoid that VAT cliff edge.

Raising the threshold to £150k would:

• Remove the fear for many, of “accidentally” crossing the line

• Let firms take on more jobs

• Encourage hiring

• Boost productivity

• Increase local economic activity

The VAT threshold is the single biggest brake on micro‑business growth. Lifting it would release thousands of firms from that stranglehold.

100,000+ MICRO FIRMS COULD AVOID VAT ENTIRELY

When the threshold rose from £85k to £90k in 2024, 28,000 microbusinesses were freed from VAT.

A jump to £150k would free far, far more, especially:

• Tradespeople

• Creatives

• Consultants

• Retailers

• Hospitality micro‑firms

• Personal services (beauty, wellbeing, fitness)

These are the businesses that fuel local economies, and they’d have room to breathe.

PRICES COULD FALL FOR CUSTOMERS

If a business doesn’t have to add 20% VAT:

• Prices stay lower

• Customers get better value

• Small firms stay competitive against big chains

This is especially important in:

• Hair & beauty

• Trades

• Food & drink

• Local retail

• Events & weddings

….where customers are extremely price‑sensitive.

THE ECONOMY WOULD GET A SHOT IN THE ARM

The Office for Budget Responsibility has already said that raising the threshold boosts growth because firms stop holding themselves back.

A £150k threshold would:

• Increase business investment

• Boost productivity

• Encourage hiring

• Support high‑street recovery

• Increase tax receipts later, as bigger firms eventually grow past the threshold

This is the kind of bottom‑up growth the UK desperately needs.

IT WOULD END THE “VAT CLIFF EDGE” THAT CRUSHES SMALL FIRMS

MPs have called the current system “nonsensical” and a “growth killer”.

A £150k threshold would:

• Reduce the cliff edge

• Stop firms bunching just below £90k

• Encourage ambition

• Make the UK more competitive internationally

It would also help businesses in Northern Ireland, who are currently stuck in a complex VAT regime.

WHO BENEFITS MOST?

Winners:

• Micro‑businesses

• Sole directors

• Tradespeople

• Creatives & freelancers

• Hospitality & retail

• Rural and home‑based businesses

• Start‑ups scaling for the first time

Losers:

• The Treasury (short term)

• Larger VAT‑registered firms which currently benefit from reclaiming VAT

• Businesses which rely on VAT to appear “bigger” to prospective customers

Raising the VAT threshold to £150,000 would be a game‑changing, pro‑growth, pro‑entrepreneurship reform. It would:

• Free thousands of small firms from VAT

• Remove the biggest barrier to growth

• Boost local economies

• Increase competition

• Lower prices

• Support high streets

• Encourage hiring

• Improve long‑term tax revenues

For small and micro businesses, it would be the biggest win in a generation. For the economy, it could be the jump‑start Britain has been waiting for.

However, there’s always another side to the coin and there could be downsides.

THE DOWNSIDES OF A £150,000 VAT THRESHOLD

Things could go wrong:

BIGGER FIRMS COULD GAME THE SYSTEM

A higher threshold means:

• More businesses will try to split into multiple companies

• Some will artificially cap turnover

• Others may restructure to stay under the line

This creates unfair competition for honest small firms who play by the rules.

HMRC hates this and it could trigger tighter anti‑avoidance rules later.

IT COULD CREATE A TWO‑TIER MARKET

If you’re under £150k, you don’t charge VAT. If your competitor is at £151k, they must add 20%.

That’s a huge price advantage for smaller firms.

Great for micro‑businesses. Not so great for growing firms which suddenly look expensive.

This could:

• Discourage firms from scaling

• Punish businesses that grow “too fast”

• Create a cliff edge even bigger than today’s

THE TREASURY TAKES A HIT AND MAY CLAW IT BACK ELSEWHERE

Raising the threshold costs the government money upfront. When the threshold rose to £90k, the Treasury lost £150m–£185m in the first two years.

A jump to £150k would cost more in the short term, but could pay back over time through:

• Higher growth

• More employment

• More income tax

• More corporation tax

• More long‑term VAT from bigger firms

It’s a classic “invest now, gain later” policy.

If the Treasury loses VAT revenue, it may try to make it up by:

• Raising other taxes

• Cutting reliefs

• Tightening compliance

• Increasing enforcement

Small firms could end up paying in other ways.

It could distort the market for VAT‑registered businesses

B2B firms which reclaim VAT won’t care. But B2C firms will. A higher threshold could:

• Push customers toward non‑VAT‑registered businesses

• Undercut VAT‑registered competitors

• Reduce incentives for firms to grow past £150k

This is already happening at £90k; a higher threshold magnifies it.

It may reduce VAT receipts long‑term if growth doesn’t materialise.

The government hopes that freeing small firms from VAT will boost growth. But if growth doesn’t happen fast enough:

• The Treasury loses revenue

• The policy looks expensive

• Future governments may reverse it

Small firms hate policy flip‑flops and this could become one.

It could slow down productivity growth

Some economists argue:

• Firms that stay small to avoid VAT invest less

• They hire fewer staff

• They avoid taking on bigger contracts

• They don’t scale or innovate

A higher threshold might encourage more firms to stay small, not grow.

It could trigger more HMRC scrutiny

Whenever thresholds rise, HMRC gets nervous about:

• Fraud

• Phoenix companies

• Turnover manipulation

• Cash‑in‑hand trading

Expect:

• More audits

• More compliance checks

• More paperwork for those near the threshold

Local economies could become more fragmented

If more firms stay under VAT:

• You get more micro‑businesses

• But fewer medium‑sized employers

• Less investment

• Less capacity for big contracts

Great for sole traders. Not great for towns that need larger employers.

THE TRADE OFF

A £150k VAT threshold would be a huge win for many small and micro businesses, freeing them to grow, hire and invest.

But the downsides are real:

• Market distortions

• Treasury pushback

• More HMRC scrutiny

• Risk of policy reversal

• Firms staying small to avoid VAT

The UK needs to decide whether the growth benefits outweigh the risks.