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Deregister VAT while “oweing” input VAT

What happens if you accumulate significant input tax, have little output tax, and then de-register?

Hello

I’ve searches but can’t find an answer.

Hypothetical;

ABC Corp incorporates and starts business

Invests £10k in marketing and claims 2k input

invests £10k in product stock and claims 2k input

sells 5k of services and charges 500 output

something catastrophic happens after x years (loss of patent, directors fall ill, whatever). Company is to be dissolved. They deregister for VAT, at which point they “owe” HMRC £3.5k

Do they need to pay this back? HMRC will effectively have donated 3.5k in cheques to ABC corp

thanks

ewan

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By Ruddles
22nd Oct 2018 21:54

Oh dear

Homework?

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23rd Oct 2018 08:22

The fact that the net VAT payable over the period of registration is irrelevant.
As long as input tax is correctly claimed, and there is no deemed supply on deregistration, there is nothing to repay.

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23rd Oct 2018 08:28

If the circumstances are genuine, you've nothing to worry about.

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to lionofludesch
23rd Oct 2018 09:03

Except only charging 10% output VAT. :-)

(Subject to exempt/zero rated outputs of course)

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23rd Oct 2018 09:15

Ewan McLean wrote:
.......at which point they “owe” HMRC £3.5k

That's where you are going wrong.
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23rd Oct 2018 10:43

VAT is not a loan relationship.

The business has paid out £20K + £4K VAT. Their suppliers have received £20K + £4K VAT. HMRC have received £4K VAT from the suppliers on their returns, and have paid £4K VAT to the business.

The net effect for HMRC is nil, they only have net revenues from VAT when it's paid by non-VAT registered persons. The business does not owe anything because the £4K they reclaimed wasn't a loan. Nor have HMRC "donated" anything to the business. The business has paid out £4K in VAT but, as a VAT registered entity, they are entitled to claim this back.

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23rd Oct 2018 11:51

VAT is only really paid by the end customer. In simple terms, the VAT charged and recovered through the supply chain results in no net income or cost to HMRC.

You've recovered £4k of VAT, but the companies that supplied you will have paid £4k of VAT to HMRC (the same £4k that you paid to those companies). So you see that HMRC is in a nil net position. You don't owe anything.

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By DJKL
to DL341981
23rd Oct 2018 11:57

That surely depends on the remaining stock on hand upon deregistration.

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to DL341981
23rd Oct 2018 12:08

DL341981 wrote:

VAT is only really paid by the end customer.

Well, that depends. It's not every retailer who can jack up his prices by 20% as soon as he hits £85000 turnover.

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to lionofludesch
23rd Oct 2018 22:55

Well that’s a whole other thread.

I’ve just been speaking to a client who is about to shut his ‘side’ business. It’s currently making about £1kpcm, but when it needs to vat register in Jan will be losing about £5kpcm.

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to atleastisoundknowledgable...
24th Oct 2018 07:31

A £72000 a year turn around ?

How so ?

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to lionofludesch
24th Oct 2018 07:49

vv high non-VATable expenses - wages, food etc. Margins are horrendous, mainly due to a sale price barrier with local sardine (pack‘em high, sell’em cheap) competitors. Currently pushing the threshold with natural growth will take him over which would make a kiss anyway, but combined with a big contract (again, same sale/cost issues but bigger numbers) is going to kills it off.

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23rd Oct 2018 12:07

WTAFF?

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23rd Oct 2018 15:11

Agreed PNL.

It was clearly a flawed business plan i.e. buying stock but instead of selling it decided to sell services instead. The 10% output tax was a clever trick though.

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25th Oct 2018 02:28

Deemed supply, 10k stock on hand at deregistration, obviously

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to Manchester_man
25th Oct 2018 07:11

Obviously ?

The stock could be worth nothing.

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