As a result of the Covid-19 crisis, many businesses are currently experiencing reduced turnover. In many cases, the business is VAT-registered, and some owners are asking whether they can now deregister. What are the rules here, and is it always advisable to do so?
There can be several motives for VAT deregistration. For example, if the majority of sales are B2C sales, i.e. not to other VAT-registered businesses, the VAT charge is a real cost to the customer. On the face of it, deregistering can offer a competitive edge as there is no longer a need to charge VAT. This may help the business recover once restrictions are lifted. It can also simplify reporting, and therefore reduce administration costs.
An obvious downside is the loss of ability to reclaim input tax on future purchases, which increases the cost to the business.
A business must deregister if it stops trading or stops making taxable supplies. It must also deregister if it joins a VAT group.
However, what we are concerned with is voluntary deregistration, i.e. where a business is still eligible to be registered but chooses not to continue to be. To deregister in this way, the business must expect its taxable sales in the next 12 months to be less than the deregistration threshold (currently £83,000).
In either case, deregistration can be requested online, or by completing Form VAT7.
Suspension of trade
With reduced profits due to Covid-19, there may be a problem. Paragraph 3.2 of VAT Notice 700/11 states that “HMRC will not allow you to cancel your registration if the reduction in your turnover is the result of your intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.”
Broadly, this means that if the only reason the business expects its taxable turnover to fall beneath £83,000 is due to being forced to close, HMRC will refuse the request to deregister. If the business can overcome this hurdle, there are further potential problems to address.
Accounting for output tax on deregistration
Where the business is holding stock and/or fixed assets at the time it deregisters, output tax must be accounted for on the final VAT return – calculated by reference to the market value of the assets in their condition at the time – as if the items in question had been sold. The only exception to this is where the output tax payable would be less than £1,000.
The output tax should be calculated at the appropriate VAT rate.
This rule includes any property that the business has opted to tax, which can lead to a very large output tax liability.
There may be further issues with commercial property covered by the capital goods scheme where the deregistration is requested within 10 years of purchase. Again, this can lead to a large output tax liability on the final return.
Do the cons outweigh the pros?
If any of these issues are relevant, the downsides to deregistration will likely outweigh the benefits – particularly if the downturn in sales is likely to be temporary anyway. A business should not deregister without considering all of the potential consequences.