Tax & admin 4 September 2020

VAT deregistration – Everything you need to know

Some businesses may benefit from VAT deregistration
Some businesses may benefit from VAT deregistration

The UK has the highest VAT registration threshold in the EU and OECD. According to government figures, the £85,000 threshold means around 3.55 million small businesses avoid having to be VAT registered. Businesses that are registered for VAT can apply for VAT deregistration, if their annual turnover falls below the VAT deregistration threshold.

In this guide we cover:

What is VAT deregistration?

VAT deregistration is allowable at any time if your business falls below the deregistration threshold, or if you expect taxable sales to fall below the threshold. It isn’t always in the interest of a business to remain VAT registered and there may be circumstances in which deregistering for VAT might be a good option.

If your business has seen turnover drop below the deregistration threshold, it may be prudent to consider deregistering from having to pay VAT, unless the VAT you are able to claim on purchases makes it feasible to remain VAT registered.

It is important to consider your business, turnover and all surrounding circumstances before you make a decision. If you aren’t sure of the implications for your own business and situation, it’s wise to seek professional advice.

What is the VAT deregistration threshold?

If you wish to degregister for VAT, your taxable turnover must be £83,000. This threshold will remain the same for two years, from 1st April 2020 to 1st April 2022. The VAT deregistration threshold is £2,000 below the registration threshold in order to avoid business having to constantly register and deregister.

What are the main reasons for VAT deregistration?

There are two main reasons a business can close a VAT registration: when it has stopped making taxable supplies or when it doesn’t expect taxable turnover to be more than the deregistration threshold.

You are therefore permitted to request a voluntary deregistration if:

  • you can satisfy HMRC that your taxable turnover over the next 12 months won’t exceed the deregistration threshold, or;
  • you close down a section of your business and are able to satisfy HMRC that your taxable turnover for the rest of the year will not exceed the deregistration threshold

You can voluntarily deregister for VAT if your income falls below the deregistration threshold, but there also situations where it is compulsory for a business to deregister.

You will only be able to deregister if you believe your turnover for the next 12 months will fall below the threshold. If you request a voluntary deregistration, HMRC are likely to want to know why you think your turnover will fall below the £83,000 threshold. You might also be asked to provide your projected turnover over the next 12 months.

It is compulsory to deregister for VAT if:

  • Your business has ceased trading and has no intention making future taxable sales
  • The business has been sold
  • If your business joins a VAT group (or a VAT group is disbanded)
  • The legal entity of your business changes e.g. a sole trader establishes a limited company
  • A farming business joins the agricultural Flat Rate Scheme

What are the advantages and disadvantages?

As with anything when it comes to deciding how to manage your business affairs, there are pros and cons to deregistering for VAT. Let’s start with the pros…

Advantages of deregistering

  • You can maintain your VAT inclusive prices, if your customers are happy to continue paying the same price and doing so won’t take you over the threshold again
  • You could attract more customers by charging less than your VAT registered competition
  • No need to submit VAT returns
  • No need to keep your accounts up to date on a quarterly basis
  • You no longer need to obtain VAT receipts

Disadvantages of deregistering

  • No ability to claim back VAT on purchases
  • Since there is no reason to keep your accounts organised and up to date, you may allow your accounts to go unmanaged making it a time-consuming job when you can no longer put the job off
  • You’ll need to monitor your income on a monthly basis to make sure you don’t creep over the VAT registration threshold
  • You could lose out on business from larger organisations because they think you are too small

How long does VAT deregistration take?

Once you have applied for VAT deregistration, you should expect to wait around three weeks for HMRC to confirm and send you an official cancellation date. This date will either be when your cancellation took effect (e.g. when your business ceased trading), or the date you requested in the case of a voluntary deregistration.

If you are being forced to deregister for VAT through compulsory deregistration, HMRC may allow the registration to remain open for up to six months to allow time to tie up all the loose ends.

You can apply online or via a written form in the mail. If you apply for deregistration online, HMRC will send confirmation to your VAT online account.

You must stop charging VAT and retain your VAT records for six years from the date of cancellation.

Unless your VAT registration is being transferred to someone who is going to run your business as a going concern, you must complete and send a final VAT return for the period up to, and including, the official cancellation date. In doing so you should account for stock or other assets you have if you were able to reclaim VAT when you purchased them, or if the total VAT due on these assets exceeds £1,000.

Even if there is no VAT due, it is still necessary to submit a Final VAT return. Simply complete the form as nil.

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