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Will a client's VAT registration be cancelled?

Is there inter-action that forces a business that incurs regular losses to compulsorily de-register

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A cattle farming client. who has operated at a miniscule level for many years, has incurred recurring losses. HMRC will soon prevent any tax relief from being allowed as the operation will not be deemed to be commercial. (I have frequently informed the client that, realistically, it isn't!) The business is voluntarily registered for VAT and receives regular VAT repayments because all outputs are zero rated. If HMRC views the activity as "non-trading for profit" will a compulsory VAT de-registration follow? This could be disatrous for the client as VAT previously recovered could then be repayable on various assets which would make a bad situation worse!

Any comments would be appreciated!

 

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Jason Croke
By Jason Croke
22nd Sep 2021 11:08

The right to register (and remain registered) for VAT is on the basis there is a taxable "business activity" either taking place or intending to take place.

Zero rated sales are taxable sales, but whether those sales are deemed to be "business activities" (as opposed to say a hobby or casual activity) is a different matter. In theory, if HMRC deem there to be no business activity, then yes, HMRC can deregister the business as the business no longer meets the conditions to be VAT registered (that is, to be "in business").

If HMRC deem that there hasn't been a business for some years, then HMRC could also seek to clawback VAT that has been reclaimed previously, although it may be difficult for HMRC to do this on the basis it is often quite difficult to determine when, exactly a business stopped being a business, especially a business that has been in a slow but steady decline.

Making regular losses is not in itself enough to identify as being not a business, but if we're talking about raising one or two cows per year but spending £1m on equipment to do it, then it does raise the question as to whether this is a business that is run with the regularity and profit motive one expects of a business.

Have you read HMRC manuals on the business test? VBNB22000 specifically.
https://www.gov.uk/hmrc-internal-manuals/vat-business-non-business/vbnb2...

I always think it is dangerous/a risk, where a business has more or less ceased to trade but remains VAT registered, the temptation to reclaim VAT is too great (ie, free money).

Maybe consider deregistering before client gets on HMRC's radar and remove temptation to keep reclaiming VAT at the same time? Depends on the facts of course.

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Replying to Jason Croke:
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By M G Weemys
22nd Sep 2021 13:30

Thanks for those comments ! In this case the activity has been going on for maybe 30 years but is now at a much more reduced level. The business has made very modest profits in the past (sometimes!) but in the last few years has reduced the level of activity and regular losses have arisen. (It's always been quite a bit more than a couple of cows a year (!) but never getting close to the VAT threshold). Whilst the "dropping under the radar comment by de-registering" is understood, this would effectively immediately trigger a VAT output charge being payable on the remaining assets. Whilst that would not be an enormous figure I suspect that it would be enough to discourage the client. FYI the recovered input VAT each year is probably less than £2K so it is not a major issue with huge sums involved in the assets held but I would still like to feel confident that the rug isn't going to be suddenly pulled out from under their feet with a nasty unexpected VAT payment becoming due. There IS definitely a business activity going on, but just very small! TBH, with the hassle of completing VAT returns and with MTD soon to be compulsory for them, it might be worth their biting the bullet but they could take some persuading!

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Replying to M G Weemys:
Jason Croke
By Jason Croke
22nd Sep 2021 14:06

Thanks for the extra detail, I take your point re. output tax due on deregistration, presumably then the assets are fairly substantial.....but as you say, if they're only reclaiming £2k a year then the admin costs of maintaining the VAT number need to be factored in alongside the ever present threat from HMRC.

But if we're saying there is a business here, even though its very small, then it should be okay. If you read the link from earlier, it talks about doing something consistently, with regularity, farming is a volatile sector so the price of a ton of wheat or cattle can go up and down and can mean huge profits or losses based on the weather or a butterfly flapping its wings in China.

I think as long as the input tax reclaimed is modest (so as not to draw attention), it should be okay. HMRC recognise the trade as farming, so will not be expecting much, if any, output tax and HMRC will have an idea of what sort of purchases are reasonable based on the sales in Box 6 and purchases in Box 7, so the risk is probably minimal, but ever present of course.

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Jason Croke
By Jason Croke
23rd Sep 2021 15:35

https://www.bailii.org/uk/cases/UKUT/TCC/2021/224.html
Recently published Upper tribunal case, about a farmer who owned land, he had a separate company which harvested and bailed hay from that land and the company sold that straw back to the farmer at a fixed amount of £500 per year, regardless of actual costs.

The UT concluded there was no business here, primarily because there was it seems the company was farming land owned by the farmer and selling the straw (which the farmer already owned by virtue of owning the land) back to the farmer. In addition, the UT noted although the activity was regular and consistent, it did not operate like a genuine business in that (page 20) there was no genuine link between expenditure (substantial) and sales (tiny).

I don't think it is relevant to this the OP's scenario but I thought I'd include it here as it involves farmers, not selling very much but incurring hefty expenditures and if nothing else, explores the concept of "business" in quite good detail.

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Replying to Jason Croke:
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By M G Weemys
23rd Sep 2021 17:14

Thank you for this additional & interesting ink. Clearly different issues in play here with individuals effectively being charged for something they already own. The nature and set-up of the transactions do suggest a situation that had been mentioned earlier - seeing an opportunity to get "free money" by having a financial structure and the arrangements to suit it. Certainly not a comparable situation or reason for anything I had queried. Any recovered input VAT had always been directly related to its own business activity, even if it operated at a very low level.

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