Peatland ecosystems contain one-third of the world’s soil carbon store and many have been exposed to drought leading to a loss of carbon. Understanding biogeochemical mechanisms affecting decomposition in peatlands is essential for improving resilience of ecosystem function to predicted climate change. We investigated biogeochemical changes along a chronosequence of hydrological restoration (dry eroded gully, drain-blocked <2 years, drain blocked <7 years and wet pristine site), and examined whether hydrological legacy alters the response of β-glucosidase kinetics (i.e. type of inhibition) to short-term drying and waterlogging. In the dry eroded gully at depth, low phenolic concentrations were associated with enhanced β-glucosidase enzyme activities (V _max ) but short-term drying and waterlogging caused a significant increase of dissolved organic carbon (DOC) and phenolics associated with increases in V _max (enzyme production) and K _m (indicative of competitive inhibition). Inhibition within the drain blocked and pristine sites at depth exhibited non-competitive inhibition (decreased V_max), whilst uncompetitive inhibition (decreased V _max and K _m ) occurred in surface peat explained by variation in humic substances and phenolics. These results suggest that loss of carbon by short-term drought or rewetting may occur from sites with a legacy of drought due to the release of non-inhibitory phenolics that permits enhanced enzyme activity.