Important issues to remember when deregistering from VAT

Deregistration from VAT is often a fairly straightforward process. However, there are some important aspects to bear in mind which, if misunderstood, could prove costly.

A business must deregister if:

it stops making taxable supplies;

the legal entity changes, e.g. from a sole trader to a company (although the new entity could retain the existing VAT number);

it is sold (although the owner could retain the VAT number);

it registered because it intended to make taxable supplies but the intention no longer exists;

it is a corporate body and wants to join a group registration; or

it is the representative member of a group registration and the group is to be disbanded.

A business may deregister if it can satisfy HMRC that taxable turnover in the next 12 months will not exceed the deregistration threshold, currently £66,000. Although supplies of capital assets can be ignored in applying this threshold, positive rated supplies of land and buildings must be included. Sometimes, satisfying HMRC of reduced turnover levels can be difficult.

Perhaps the area most misunderstood is the treatment of assets on hand at deregistration. VAT must be accounted for on tangible assets on hand (intangible assets such as goodwill are excluded) and positive rated interests in land on hand at deregistration where the VAT due would exceed £1,000.

Therefore, the VAT-inclusive value would have to be £6,714 or more if all the assets were standard rated and the rate was 17.5 per cent (£7,667 with the rate at 15 per cent). It is important to include any relevant assets previously acquired in a transfer of a going concern, even though no VAT would have been charged at the time. However, assets may be excluded if VAT was not deductible on their original purchase e.g. cars, goods for business entertainment and any goods wholly used for exempt activities (although if the input tax was partially recoverable, such assets must still be included).

If compulsory deregistration applies, HMRC will often allow the registration to stay open for up to 6 months in order to ‘tie up loose ends’.