A VAT registered business can deregister at any time if it expects sales in the next 12 months will be less than the deregistration threshold. Could this be a worthwhile opportunity for many small businesses? A business cannot deregister from an earlier date retrospectively if it is still trading, so it is important to identify the potential benefits when they arise.
The rules for deregistration can be tricky, particularly for users of the flat rate scheme or a business that owns stock and assets when it deregisters. It is important to be aware of these rules to maximise tax saving opportunities and submit an accurate final return before the business deregisters.
Here are the basic rules for deregistering a trading business:
- A business can deregister at any time if taxable sales in the next 12 months are expected to be less than the VAT deregistration threshold (currently £83,000).
- The date of deregistration is based on the date when the application is received by HMRC or a later date, and not on a retrospective basis.
Output tax on assets and stock
There is a "deemed supply" of goods at the time of deregistration, so a business must generally pay output tax on any standard rated stock and assets it owns at that point. The relevant figure is the market value of the asset, so the calculations consider wear and tear, obsolescence and damage to the items in question. However, the good news is that certain items can be omitted. And output tax is only payable if the total market value of the items that remain is more than £5,000 (i.e. VAT payable exceeds £1,000):
Stock and assets are excluded if no input tax was claimed when they were purchased e.g. a computer bought from a friend or supplier who was not VAT registered;
There is no output tax to pay on zero-rated or exempt items e.g. most food stock for a restaurant or a motor car where input tax was blocked on purchase;
Output tax is declared on the final VAT return on all relevant stock and assets if the £5,000 limit is exceeded i.e. not just the value above £5,000. So, if the total value of relevant assets is £6,000, output tax of £1,200 will be due rather than £200.
Cash accounting scheme
If a business uses the cash accounting scheme, it only accounts for output tax or claims input tax when payments have been made to suppliers or received from customers. However, the final VAT return before deregistration must be competed based on debtor and creditor accounting. This makes sense because it is the last chance to account for output tax and claim input tax on sales and purchase invoices raised by the business while it is VAT registered.
Post deregistration expenses and bad debts
If a business deregisters and then subsequently receives purchase invoices that relate to its period of registration, there is scope to reclaim VAT by sending form VAT427 to HMRC along with original purchase invoices. The form can also be used to claim bad debt relief if some of the debtors on which the business accounted for output tax while it was registered subsequently go bad.
I have so far considered the rules for voluntary deregistration, however, there are situations when a business must deregister on a compulsory basis including where:
- it has ceased to trade and has no intention of making future taxable sales;
- it has been sold;
- it joins a VAT group (or a VAT group is disbanded).
- the legal status of the business changes e.g. a sole trader incorporates the business; and
- a farming business decides to join the agricultural Flat Rate Scheme
In the case of legal entity changes or business sales, the new owner can retain the VAT number of the previous owner if both parties agree. The process is straightforward, but the main disadvantage is that the buyer takes over the VAT liabilities and potential VAT errors of the seller for the last four years. So it is usually wise for the buyer to start with a clean slate and a new VAT number.