VAT deregistration is an important task to address as it must be actioned within 30 days if you stop being eligible, or you may be charged a penalty.
As a business owner, you are accountable for the cancellation of your business VAT registration in the UK if you’re no longer eligible to be VAT registered. This may be because you stop trading, drop below the VAT threshold (£83, 000 turnover) or stop making VAT taxable supplies, or you might have joined a VAT group.
This guide will help you answer all your questions.
Why would you deregister for VAT?
One of the common reasons for deregistration is when a business falls below the VAT threshold. Once your turnover is below that threshold, there is no need to be registered until you reattain the registration thresholds.
If you present to HMRC that your forecasted taxable turnover, for the following tax year, will fall below the deregistration threshold you may deregister. Even if you are currently trading above the threshold for the entire year, you can still apply for deregistration. This would be on the quantifiable basis of a forecasted trend that suggests your forthcoming year will fall below the threshold.
The threshold is not automatically derived from the net taxable turnover figure in Box 6 of VAT return. It does not accurately represent the invoice value of taxable supplies if the entity were not registered. The gross turnover is the relevant figure.
Can I deregister for VAT at any time?
Deregistration is not allowed if its threshold is crossed by a reduction in turnover from closing the business for 30 days or more.
Prospective sales of capital goods aren’t seen as turnover (except positively rated land).
You may deregister (subject to certain factors) when registration was due to the acquisition of goods from the EU or the distance selling rules.
If you choose to register for distance selling voluntarily, you cannot switch back to home-country VAT rates until 1 January after the second complete year of being registered.
If your business model changes to trading in non-taxable supplies, you must notify HMRC within 30 days to de-register.
If your intention is to cease trading you should file to deregister for vat with the required 30 days notification period.
How would HMRC know a business had ceased?
In practice, HMRC would only pick up when trading ceased after two or three quarters in a row. Your business must, however, have zero intention after restarting taxable trading. If the intention is there, then it is not deemed ceased. HMRC will only engage with a deregistration process if the intention to not continue trading is there, and the activity appears to cease.
HMRC does not want to ‘flog a dead horse’, and they are required by legislation to deregister a business quickly if relevant. It costs the country money to keep dormant businesses on the register, and therefore, they are quick to shave off loss-giving accounts.
It is not uncommon that when a business ceases to trade, some customers have failed to pay. After the deregistration, your business may claim bad debt relief for up to four years via completing the VAT427 form online, printing it off to be signed and submitted. As always, it is essential you have all the supporting documentation to hand in BEFORE starting because a half-completed form cannot be saved.
Additionally, and this is one point to note carefully, the HMRC can collect tax in the process of the deregistration of your business. This brings us to the possible disadvantages of deregistering.
Disadvantages of deregistering
When considering changing your business from a vatable business to a non-vatable, you should definitely consult with your CFO or accountant. This is necessary to be secure in the knowledge that the business will not lose out financially.
The treatment of assets
One of the biggest deregistering disadvantages that your financial advisor will bring to your attention, which needs to be addressed before allowing inevitable deregistration to occur, is the treatment of assets.
VAT calculated on assets
This is referring to any assets that are on the books. They will be deemed, by the HMRC, to have been supplied to your business at the going open market value. VAT will be calculated on that value, and it will be payable to HMRC if it calculates out to be more than £1, 000.
Some assets are zero-rated and therefore, will not be subject to VAT. In other cases, you may find that some of the assets will only have VAT calculated on the margin between the price you paid when purchasing it and the current open market value. This would be the case if these assets were acquired under the second-hand margin scheme.
Another deviation from the above options is that the rule mentioned above may not be applied to your assets if:
VAT was charged to your business when purchasing the goods, and you could not reclaim any portion of that VAT.
If your business did reclaim it, OR
If your business reclaimed any proportion of that VAT, from a small portion of the total amount, OR
Your business did not pay VAT on it when purchasing it; then it owes the VAT to the HMRC.
What can you do with your assets?
In order to close the circle on the asset, it must be noted as this is not a product being supplied to any other party but an asset. Therefore, there is nobody to claim back the VAT.
Sell your assets
It becomes clear, through this breakdown, that it would be a better option to sell the acquired assets for scrap or on the low earning, 2nd hand market. This is a better option because you avoid your business arriving in the position of having this “exit charge” blowing your finances out the water.
An additional note to the value of the assets is that the open market value is defined to be in effect the purchase price for which you would expect to pay, at that time, if buying those exact goods, in that exact condition, of the same age on the open market.
If your business’s assets should be rapidly depreciating goods, then it would be prudent to choose the better financial option of delaying the deregistration. You and your financial advisor would then attempt to select the latest possible milestone date, by which time that asset value would be greatly reduced. This legally and strategically avoids paying a high exit charge. It is strongly advised to attempt this strategy and carefully cost different scenarios; otherwise, you will be paying the VAT, only to watch the market value charge downhill after having paid VAT calculated on a high value.