Why are the number of VAT registered businesses increasing?

Running a business comes with a seemingly endless list of requirements, but recently, one trend has emerged that has UK businesses talking—the steady increase in VAT registrations among all types of companies. From limited companies to sole traders and even online businesses, many organisations are crossing the VAT registration threshold or deciding to register voluntarily. What’s driving this trend, and what does it mean for UK businesses? This blog unpacks what’s behind the numbers and how VAT registration impacts business owners.What Is the Current VAT Registration Threshold?Before we can understand why VAT registration is on the rise, it’s important to revisit the basics. Under current regulations, any business with taxable turnover above £90,000 is required to register for VAT with HM Revenue and Customs (HMRC). This threshold was increased in 2025 from the previous limit of £85,000.According to the Office for National Statistics (ONS), the UK had approximately 2.727 million VAT and/or PAYE registered businesses as of March 2023. With inflation and business growth tied to this rise, more businesses are finding themselves exceeding the threshold or choosing to register voluntarily. For many, VAT registration marks a major milestone—but what’s driving the uptick?What Is Fueling the Increase in VAT Registrations?Has Inflation Caused Businesses to Surpass the VAT Threshold?Inflation has direct and indirect impacts on all aspects of business operations, including VAT registration. Increased costs for goods and services often lead to higher prices, which in turn push businesses’ taxable turnover beyond the £90,000 threshold.For example, recent data from The Times highlights how over half of British businesses plan to increase their prices due to rising costs. This naturally pushes revenue higher, meaning more businesses hit the VAT registration threshold—even if their profit margins remain tight.Is the Making Tax Digital (MTD) Initiative Encouraging VAT Registrations?Another key driver is the government’s Making Tax Digital (MTD) initiative. HMRC now requires all VAT-registered businesses to maintain digital records and submit VAT returns online. MTD is part of a broader push to streamline tax reporting and reduce errors, but it has also incentivised businesses to register for VAT to stay compliant with digital filing regulations.For many small businesses, MTD compliance tools like accounting software have made it easier to manage VAT returns, encouraging them to take the leap.Has Business Growth Played a Role?Business expansion has always been a leading cause of VAT registration. Despite economic challenges, many UK businesses are seeing growth in sectors like e-commerce and tech, with increased turnover often pushing them past the VAT threshold. Successful businesses naturally outgrow their tax exemptions, and registering for VAT becomes a necessary step to formalise further growth.Why Are Some Businesses Choosing to Register Voluntarily?Not every VAT-registered business is required to do so by law. Many choose to register voluntarily, even if their turnover is below the £90,000 threshold. Why? Because VAT registration comes with several advantages:Reclaiming VAT on Purchases: VAT-registered businesses can recover VAT on their business expenses, reducing their overall tax liability.Boosting Business Credibility: Operating as a VAT-registered business signals to clients and suppliers that you’re a serious, established organisation.Meeting Client Expectations: Larger clients often prefer working with VAT-registered suppliers, as they too can reclaim VAT, making such collaborations mutually beneficial.What Does VAT Registration Mean for UK Business Owners?How Does VAT Registration Affect Small Business Owners?Small business owners and sole traders often view VAT registration as both a milestone and a challenge. While it enhances credibility and opens up opportunities to reclaim VAT, it also introduces new responsibilities:Accurate Record-Keeping: VAT-registered businesses are required to maintain detailed financial records—this is non-negotiable.Timely VAT Returns: Submitting VAT returns every quarter is mandatory, and missing deadlines can result in penalties.Compliance with HMRC Regulations: Businesses must follow HMRC’s rules to avoid fines and ensure they’re calculating and reclaiming VAT correctly.Many small business owners turn to online accountants to manage these administrative duties effectively. Professional accounting services help ensure compliance, reduce the risk of errors, and even identify allowable expenses that can further reduce tax liabilities.What Challenges Does VAT Registration Present for Online Businesses?For e-commerce companies, VAT compliance can be particularly complex due to cross-border sales. With VAT obligations differing across countries, businesses often need VAT-specialist accountants to stay on top of international regulations. The UK's exit from the European Union has only added to the intricacy, making expert advice even more crucial.How Can Business Owners Handle VAT Obligations?Navigating VAT can feel overwhelming, especially for business owners without a dedicated finance team. To simplify the process, consider these strategies:Invest in Digital Tools: Software compatible with HMRC’s Making Tax Digital framework can significantly streamline VAT record-keeping and submission processes.Partner with Financial Experts: Hiring accountants or tax advisors experienced in VAT compliance can save time and money in the long run.Stay Educated: Regularly review updates from trusted sources like the Office for National Statistics and HMRC to stay informed about changes to VAT regulations.Focus on Tax Efficiency: Analyse your expenses for VAT reclamation opportunities and ensure you’re fully benefiting from your VAT-registered status. Tools like Outwrite’s grammar checker can improve internal documentation and communication efficiency when liaising with HMRC.Why Staying Ahead of VAT Compliance Is VitalVAT registration isn’t just about compliance—it’s a pivotal step toward business growth. The evolving landscape of UK business, coupled with regulatory initiatives like Making Tax Digital, highlights the need for owners to take VAT responsibilities seriously.Whether you’re exceeding the VAT threshold due to inflation, expanding your operations, or voluntarily registering to unlock opportunities, staying informed is essential. Partnering with online accountants or using automated tools can make VAT compliance far easier, reducing stress while helping your business thrive.Feeling unsure about where to start? Reach out to an accounting expert to assess your VAT situation today—it’s the first step towards total tax confidence.