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How to claim VAT after deregistering

31st Mar 2017
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Neil Warren advises how to claim bad debt relief and recover input VAT incurred on purchases, after cancelling a VAT registration. The key is smart record keeping and using form VAT427 in a timely fashion.

Cancellation rush

Last week (27-31 March) was probably a record period for HMRC receiving requests for VAT deregistration. The reason is that many businesses registered on a voluntary basis were benefitting from the tax savings of the flat rate scheme (FRS). These traders will have ended their membership of the VAT club to avoid the new 16.5% rate for “limited cost traders”, which took effect on 1 April 2017.

But this might not be the end of the VAT club completely. There is scope to claim input tax and bad debt relief after deregistration by using form VAT427.

FRS leaving date

When a business deregisters, it is deemed to leave the FRS on the day before deregistration takes effect, so 30 March for deregistration from 31 March. It must therefore account for FRS tax on all debtor sales at this date if it used the cash based turnover method of calculation.

Example one

John is a freelance computer consultant who deregistered on 31 March to avoid being a limited cost trader. Many of his clients are not VAT registered (small businesses and private individuals) so he will increase his prices by 10% on 1 April for these clients, thereby sharing the VAT saving with them.

John is deemed to leave the FRS on 30 March, meaning that he must account for 20% output tax on all sales made on 31 March rather than his FRS rate. He can also claim input tax on purchases for 31 March only. In effect, he has reverted to normal VAT accounting for one day only. He must calculate output tax less input tax for that day.

Post cancellation claim 

Form VAT427 is designed for this purpose. It can be completed online but must be printed off and posted to HMRC. It gives scope for John in Example one, to claim VAT from HMRC after deregistration in relation to:

  • Bad debt relief see Example two below.
  • Late purchase invoices received from suppliers after the final VAT return has been submitted but showing a date of 31 March. As explained above, John can only claim input tax on expenses dated 31 March, because of the input tax restrictions that apply to earlier dates due to his FRS membership.
  • Purchase invoices dated after 31 March but which relate to the period before deregistration. This is a winning outcome with the FRS. The business left the FRS on 30 March so is able to claim post deregistration VAT in the same way as a non-scheme user. An important example of where this situation could arise relates to accountancy fees, see Example three. (VAT Notice 700/11, section 9).

Note: all VAT427 input tax claims must be submitted to HMRC with the original purchase invoices.

Example two

John accounted for VAT at the appropriate FRS rate on his closing debtors at 30 March, i.e. the day he left the FRS scheme. But some of these debts were never paid, so they became bad at a later date.

John could claim bad debt relief by submitting form VAT427 to HMRC, i.e. by making a bad debt claim in the usual way based on the six month rule, and writing the invoices off in his accounts. The claim would be the full output tax of 20% shown on the sales invoice(s) in question. The time limit for a bad debt claim is four years and six months from the date when the relief first became claimable.

Example three

John’s accountant prepared his year-end accounts to 31 March 2017 on 28 January 2018, and raised an invoice for his services on this date for £800 + VAT. John can claim VAT of £160 on form VAT427 because the expense relates to a period when he was VAT registered and making taxable supplies. The fact that he used the FRS for 364 days in the year in question, is irrelevant!

Replies (3)

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By Tim Robinson
06th Apr 2017 09:53

Claiming VAT relief on bad debts isn't as easy as it should be, in order to support the claim that I made for £90 following deregistration of my accounting practice I was asked for;

"(1) certified copies of othe supporting evidence (for example, invoices);
(2) proof that the debt has remained unpaid for 6 months from the date payment became due and payable, or the time of supply if later;
(3) evidence that you/your client has pursued the debts (and no longer pursuing the debts); and
(4) proof that you possess a separate bad debt ledger"

Having sent copies of the invoices how can they ask for further information at (1)? (2) is asking me to prove a negative.

The tone of the letter strikes me as discouraging a claim for bad debt relief after deregistration and it has almost worked in my case.


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By AamerAmin
15th Apr 2017 16:00

You may use Form VAT 427 (VAT 426 if your business is insolvent) to claim input tax on goods or services supplied to you for business purposes while you were registered, that you didn't claim either on your normal returns or on your final return

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Replying to AamerAmin:
By AamerAmin
15th Apr 2017 16:11

HMRC will need original documentation (i.e., invoices, supporting evidence etc.) to be sent with the VAT 427 claim form.
Aamer // Accountant Manchester

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