If the turnover of your business has fallen below £83,000pa then you may no longer need to charge and pay VAT. If this is so then you may apply to HMRC to deregister for VAT. In this article we will explain what is meant by deregistering for VAT, when a business can deregister for VAT, the pros and cons of deregistering and how to deregister for VAT.
What is meant by VAT registration & deregistration?
Your business must register for VAT with HMRC if it has had a taxable turnover of more than £85,000 in the last 12 months. This is referred to as the “VAT threshold”. Your business must also register for VAT if you expect your turnover to exceed £85,000 within the next 30 days. You may also register for VAT voluntarily, even if your taxable turnover is less than £85,000. This is referred to as “voluntary registration” for VAT.
Taxable turnover refers to the value of everything that your business sells, including:
- Goods and services that are not exempt from VAT
- Goods that are zero-rated for VAT
- Goods that you have hired or loaned to customers
- Business goods that have been used for personal reasons
- Goods that you have bartered, part-exchanged or passed to other parties as gifts
- Services received from businesses in other countries incurring a “reverse charge”
- Building work with a value of more than £100,000 that your business did for itself.
VAT deregistration means cancelling your VAT registration with HMRC. If you deregister for VAT then you will no longer need to collect and pay VAT. This pertains to all types of business structures including limited companies, limited liability partnerships (LLPs) partnerships and sole traders.
When is it compulsory to deregister for VAT?
You must apply to HMRC to cancel your VAT registration if your business:
- Stops trading – if your business stops trading, for any reason, then you must advise HMRC and cancel your VAT registration.
- Stops selling VAT-taxable goods and services – VAT can only be charged on VAT-taxable goods and services to customers. If you stop selling VAT-eligible goods and services then you may therefore cancel your VAT registration. This may happen because you were selling VAT-taxable goods and services but no longer do so. Otherwise this may happen because you planned to sell VAT-taxable goods and services but have not done so.
- Joins a VAT group – VAT groups are made up of 2 or more eligible business entities that are treated as a single taxable entity for the purposes of VAT. VAT groups have their own VAT number and collect, report and pay VAT on behalf of their members. If your business joins a VAT group then you may apply to deregister for VAT. This is because a business may have only one registration for VAT at any one time.
- Join the Agricultural Flat Rate Scheme – The VAT Agricultural Flat Rate Scheme is a flat rate scheme for farmers and other agricultural businesses. The rules state that you cannot be registered both for VAT and also as a flat rate scheme member at the same time. In this situation you will need to deregister for VAT.
- Is sold – if you sell your business then you must deregister for VAT. If you sell your business to a new owner who will continue to use the same VAT number then you can apply for a VAT registration transfer.
- Changes its legal business structure – if you change the structure of your business from a sole proprietor to a partnership or limited company then you must cancel your VAT registration. If you want to keep your existing VAT number then you will need to request the “transfer of a going concern”. If you do not want to keep your existing VAT number then you must select a “change of legal entity”.
Deadline for cancellation of VAT registration
In any of these scenarios you have 30 days from when you are no longer eligible for VAT to deregister.
When can I deregister for VAT on a voluntary basis?
The rules state that you may ask HMRC to cancel your VAT registration (i.e. deregister your business for VAT) at any time if your taxable turnover falls below £83,000. Taxable turnover can fall for many reasons, including:
- falling demand for your goods and services
- external factors (as was the case for many businesses during the COVID-19 pandemic)
- reduced working hours
- loss of an important client
- selling VAT-exempt products and services
- expiry of valuable contracts.
When you apply to deregister for VAT you must tell HMRC why you expect your VAT-taxable turnover to fall below the threshold of £83,000 in the next 12 months. It is always advisable to carry out a detailed analysis of your future turnover. This will allow you to understand the impact of changes to your business that may increase or decrease your turnover.
Why is the VAT deregistration threshold below the registration threshold?
The VAT deregistration threshold is set at £2,000 lower (£83,000) than the registration threshold (£85,000). This is done so that businesses don’t opt in and out of VAT due to relatively small changes in turnover around the threshold.
Advantages of deregistering for VAT
Depending upon the circumstances, deregistering for VAT can offer a number of useful benefits, including:
- Reduced accounting and record-keeping requirements
- Lower overall prices for your goods and services
- Attracting non-VAT registered customers
- No need to keep VAT records (i.e. receipts to reclaim VAT)
- No need to prepare and submit quarterly HMRC VAT Returns
Disadvantages of deregistering for VAT
It is also important to understand the implications of deregistering for VAT. Deregistering will mean that:
- You can no longer reclaim the VAT paid on products or services purchased by your business
- You may need to reregister for VAT if your business experiences an increase in taxable turnover
- If you are close to the threshold then you will need to keep a close eye on your turnover each month to ensure you do not exceed the threshold
- Non-VAT-registered businesses may not work with you
- Not being registered for VAT may create a perception that your business is not doing as well as it was
- Your business may be perceived as small and less credible, which may put off potential clients, suppliers and investors
- You must closely monitor turnover on a monthly basis to avoid going beyond the VAT registration threshold
Although it may be tempting to deregister for VAT there may be negative implications in doing so, some of which may hinder your business. For this reason we recommend that you speak with your accountant, who can explain the options in your case. An alternative would be to switch to the VAT flat rate scheme, which would allow your business to keep the difference between what you charge your customers and pay to HMRC.
How to deregister for VAT
You can apply to HMRC to deregister for VAT either online or by post.
Deregister for VAT online
To deregister for VAT online you should:
- Log into the Government Gateway using your user ID and password
- Click “deregister for VAT”
- Complete the application form – you will need to enter the following:
- VAT number
- Company or trading name
- Main business address
- Contact phone number
- Reason for VAT deregistration
- Date when you will stop trading, stop making taxable supplies or want to deregister for VAT voluntarily.
The online deregistration process can be completed by the business owner, a partner, a director, a company secretary or an authorised agent.
Deregister for VAT by post
To deregister for VAT by post you should:
- Complete form VAT7 – the form is filled-in online
- Print your completed form VAT7
- Post the form to HMRC – the address will be on the form
After you have submitted your deregistration application to HMRC
In most cases, depending upon how you applied, you can expect to receive confirmation of VAT deregistration within 3 weeks, either online (to your VAT online account) or else by post. This will confirm a) that your business has been deregistered for VAT and b) from when this applies.
Once HMRC has confirmed that you have been deregistered you must:
- Stop charging VAT from the cancellation date provided by HMRC
- Keep all of your VAT records for at least 6 years
- Submit a final VAT Return for the period up to and including the VAT registration cancellation date. You must do this within 1 month (unless you are on the Cash Accounting Scheme, in which case you have 2 months).
- Remove any references to your VAT number on your invoices, correspondence, website etc., and
- Account for any stock and other assets that you have on hand if a) you reclaimed – or could have reclaimed – VAT when you bought the assets and b) the total VAT due on these assets is over £1,000.
Uniwide Formations is a leading specialist in UK company formation. To make your registration as easy as possible we offer a Streamlined VAT Registration Service. We will prepare and submit your VAT registration application to HMRC, provide access to a VAT registration specialist and explain how to access your HMRC Government Gateway account to activate your VAT registration.