Considerations before deregistering from VAT
Many businesses have experienced significant decreases in turnover due to the current economic climate and maybe considering voluntarily deregistering from VAT if their turnover has fallen below the deregistration threshold (currently £83,000).
If a business expects that their taxable turnover in the next 12 months will be less than £83,000, they can deregister from a current or future date.
The £83,000 taxable turnover level includes all standard, reduced and zero-rated sales but excludes exempt and outside the scope sales. It is therefore really important that the correct VAT treatment of sales is ensured whilst making this calculation. For example, if a business sells services outside the UK these will normally be classed as outside the scope and not included in the turnover calculation whereas the sale of goods outside the UK will be classed as zero rated and will be included in the turnover calculation.
If a business has ceased to make taxable supplies because it has ceased entirely or all supplies have become exempt from VAT they must deregister, this is known as compulsory deregistration.
While turnover level is one of the main considerations for voluntary deregistration there are other factors that should be considered before any final decision is made.
Assets and stock
A business must pay output VAT on any stock and assets it owns at the time of deregistration.
The VAT payable on stocks and assets is calculated on the market value of the asset so things such as wear and tear, damage etc. are considered.
Stock and assets that had no input VAT claimed on them are excluded
No output VAT will be due on zero rated (for example most food stock) or exempt items
If the total VAT payable on the assets is £1,000 or more the VAT must be repaid to HMRC on the final VAT return.
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 completed on the basis of 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 registered for VAT.
If there are lots of customers owing money to the company paying over all the VAT on these sales before the funds are received from customers may be costly.
There is scope to claim bad debt relief for any sales that remain unpaid after the final VAT return is submitted by completing form VAT427.
If a business owns a property which has an option-to-tax election on which input VAT was recovered, output VAT will be payable on the market value of the property at the date of deregistration.
This could be extremely costly for a business; it may be worth considering waiting until the option-to-tax can be revoked (can be done 20 years or more after election made) before deregistration.
Capital Goods Scheme
Even without an option to tax on property there may still be a VAT liability at the time of deregistration.
A property purchased by a business costing £500,000 + £100,000 VAT would be classed as an exempt asset with no option to tax and therefore would pass the assets and stock test.
However, because the property cost more than £250,000 excluding VAT the original input claim of £100,000 is subject to a 10-year adjustment period under the Capital Goods Scheme.
Whilst making taxable supplies the property would be linked to taxable use but if the business deregisters from VAT the property becomes linked to exempt use. If the property was used by the business for 5 years when VAT registered it means 50% of the input VAT will need to be repaid, as there would be 5 years linked to exempt use in the 10 year adjustment period.
If you have any questions or would like to speak to our team about your situation, then please get in touch! You can call on 01243 782 423 or head to our contact form!
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