The VAT threshold trap: why turning down work in October might be the right call

Somewhere around October, a good year turns into a maths problem. You're busy, the diary's full, and the running total says you'll clear £90,000 if you keep taking work. Every trader who's been near it knows the question that follows: do I actually want to?

It sounds absurd — turning down paid work to keep your turnover down. It isn't. It's a rational response to one of the sharpest cliff edges in UK tax, and it's worth understanding properly before it decides your winter for you.

How the test actually works

Three things about the £90,000 threshold that catch people out:

• It's turnover, not profit. The total you invoice, before materials, fuel, or anything else comes off. A £95k-turnover, £40k-profit business is over.
• It's a rolling 12 months, not the tax year. At the end of every month, add up the last 12 months of takings. If that number passes £90,000 — any month, not just April — the clock starts. You can't reset it by having a quiet January.
• There's a forward-look too. If you expect to go over £90,000 in the next 30 days alone — say you've just won one huge contract — you have to register straight away, not wait for the rolling total to catch up.

Cross the line and you must register within 30 days of the end of that month, with VAT applying from the first day of the second month after. Go over in September, and you're charging VAT from 1 November.

What crossing actually costs

If your customers are VAT-registered businesses, crossing is mostly paperwork — they reclaim whatever you charge them.

Most sole-trader electricians, plumbers and joiners don't work for businesses. They work for homeowners, and a homeowner can't reclaim anything. The day you register, every job you price has a choice attached: add 20% and hope you're still competitive against the trader down the road who's under the threshold — or hold your prices and hand roughly a sixth of your takings to HMRC.

You do get something back: the VAT on your materials, tools, fuel and van becomes reclaimable. On materials-heavy work that softens the blow a good deal. On labour-heavy work it barely helps.

And there's no taper. £89,999 of turnover: nothing. £90,001: the whole regime — VAT on your invoices, quarterly digital returns through Making Tax Digital software, the lot. Which is why the worst place to be isn't over the threshold; it's just over it, doing the same work for less margin than the trader £5k behind you.

You're not imagining it — the cliff shows up in the data

Researchers with access to UK tax records have measured this. Business turnover visibly bunches just below the registration threshold — a pile-up of firms stopping short of the line — and it's strongest among firms selling to the public rather than to other businesses. Follow-up work found growth slowing by up to two percentage points as firms approach the threshold, and the pattern in their costs says it's real work being declined, not income being hidden.

So if you've ever knocked back a November job to stay under, you're part of a well-documented national phenomenon. The threshold has been frozen at £90,000 with no end date announced, and no taper has ever made it past a consultation — so the cliff isn't going anywhere soon.

The Flat Rate Scheme — check the small print

You'll hear the Flat Rate Scheme mentioned as the painless version: charge 20%, pay HMRC a lower flat percentage of turnover, keep the difference, skip most of the bookkeeping.

For some trades it helps. But there's a trap built in for labour-heavy work: if you spend less than 2% of your turnover on goods (or under £1,000 a year), you're a "limited cost business" and the rate jumps to 16.5% — which, once you work it through, leaves you keeping almost none of the VAT you charge while losing the right to reclaim VAT on your bigger purchases. Labour-only subcontractors land in this category all the time. Run the numbers with an accountant before choosing it; the 1% first-year discount doesn't rescue a bad fit.

Deciding deliberately

Staying under is legitimate. Crossing is often right. The trap is doing either by accident. A rough decision guide:

• Mostly domestic customers, happy at your current size? Staying under is a defensible business model, not cowardice. Price your work knowing your capacity for the year is finite — scarce Novembers should be expensive Novembers.
• Mostly commercial, landlord or builder customers? The threshold matters far less — they reclaim what you charge. Registering (even voluntarily, before you must) lets you reclaim VAT on the van, the tools and the materials.
• Growing past it? Cross decisively. The dead zone is £90k–£110k, where you carry all of the admin and price disadvantage with little of the scale. If the plan is growth, plan to move through that band, not settle in it.

Whatever you choose, the rolling 12-month total is now a number you need to know — not in January when the accountant does the books, but at the end of every month. Going over without noticing is the expensive version: HMRC registers you from the date you should have registered, bills you the VAT on everything you invoiced since — money you never collected from those customers — and can add a penalty on top based on how late you told them.

Keeping every job and invoice in one place — which is what grafter.ly does — makes that monthly check a two-minute glance instead of a shoebox audit. However you track it, track it. The threshold is only a trap if it catches you unaware.