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VAT: Don’t deregister in haste

Does the coronavirus pandemic mean that it’s now a good time for some small businesses to deregister from VAT? That may not be wise or possible, explains Neil Warren.

25th Mar 2020
Independent VAT Consultant
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Many small business owners will be considering if the trading impact of the coronavirus means now is the right time to deregister from VAT. The basic rule is a business can deregister if it expects taxable sales in the next 12 months to be less than £83,000. The deregistration date can only be from a current or future date.

Temporary cessation of trading

If a business is VAT-registered and is still trading, any request will be for voluntary deregistration. The approach is to either complete a paper version of form VAT7 and submit to HMRC or complete and submit online. But there is a potential problem with the legislation as explained in VAT Notice 700/11, para 3.2:

“HMRC will not allow you to cancel your registration if the reduction in your turnover is the result of your intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.”

The above power is given by VATA 1994, Sch 1, para 4(2).

Example one

John is VAT registered and trades as a sports shop with annual sales of £96,000 excluding VAT. He expects the shop will be closed from 24 March until the end of June because of the coronavirus.

His expected taxable sales in the next 12 months will therefore be £72,000 based on a nine-month trading year. But this reduction is because of suspended trading exceeding 30 days so he cannot deregister.

Example two

Janet trades as a management consultant with annual sales of £96,000 excluding VAT. She is mainly unaffected by the coronavirus because she works from home but because she cannot visit clients due to social distancing and travel restrictions, she expects her taxable sales in the next 12 months will be only £70,000. She can deregister from VAT immediately because her expected sales are less than £83,000.  

Stocks and fixed assets

There is a major pitfall with all VAT deregistration situations, namely the need to account for output tax on stock and fixed assets owned by a business at the time of deregistration.

Output tax is based on the market value of the items but there is a de-minimis threshold if the total VAT payable on all stock and assets is less than £1,000. There are certain exclusions that will reduce the liability. See my tips for deregistration in September 2017 – they still apply.

Property pitfalls

If a business owns property on which it paid VAT on the purchase of the building, then claimed input tax, there are two potential horror situations with deregistration:

Option to tax: If the business opted to tax the property, then output tax will be payable on the final VAT return under the fixed asset rules considered above, based on the market value on the date of deregistration, VAT Notice 700/11, para 7.4.

Capital goods scheme: If the property cost more than £250,000 excluding VAT or there have been improvement works, extensions or refurbishment projects that exceed this amount, any remaining intervals under the capital goods scheme must be declared on the final return. Adjustments are made over a 10-year period. This might lead to a large VAT bill on the final return depending on the circumstances, see VAT Notice 706/2, para 9.6.

Conclusion

It sounds tempting to deregister and possibly save VAT in these difficult times but there are a number of pitfalls and rules that could make it a non-starter. In most cases, the best option will be to remain in the VAT club.

Replies (7)

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By mjshort
26th Mar 2020 06:51

Surely our clients can deregister as they have stopped making taxable supplies.

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By djbrown
26th Mar 2020 10:46

Re HMRC guidance: "HMRC will not allow you to cancel your registration if the reduction in your turnover is the result of your intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.”

Surely in example 1, it's not the client's intention to cease trading? He is being prevented from trading...

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Replying to djbrown:
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By rmillaree
03rd Apr 2020 10:09

I have a client in this situation , at present i expect turnover next 12 months will be below 83k. However if i wait 2 months and the company expects to re-open their shop within say 30 days due to being given the all clear i could imagine at that later time the expectation would not be so clear cut. However i am not convinced the article is wrong.

"Surely in example 1, it's not the client's intention to cease trading? He is being prevented from trading..."
I think the problem is that the legislation specificlaly says

"he will cease making taxable supplies , or will suspend making them for a period of 30 days or more"

taking this at face value if its a forced suspension - it doesnt alter the fact it still is a suspension - despite the facts its not a cessation - they will likely be making no taxable supplies for the next 30 days - if they expect to remain closed. It's alla bit too much as i guess when they open they will be at a lower level than recently and would be below the threshold anyway - i have always been loathe to use assumptions that may look stupid later though - it could possibly end up that they have high initial sales when they re-open as their customers have been missing out on their quality fair. I guess in current times i really shouldnt worry about my reaosnable assumptions being slightly off [***].

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Replying to rmillaree:
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By rmillaree
03rd Apr 2020 10:10

ooops that 4 letter **** word was used in a very reasoanble context - i wasn't trying to say anything naughty :)

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By Nick Graves
26th Mar 2020 10:50

Seems a bit previous to throw in the towel so quick.

Many businesses will have ongoing costs, so are 'trading' despite having no taxable supplies.

Might as well claim the VAT refunds due pro tem.

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By jcace
26th Mar 2020 11:42

Really helpful article, thank you Neil.

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By rockallj
26th Mar 2020 16:11

Neil, if a client has constructed a "home office" solely for business use and claimed back all the VAT, is there an issue on deregistration? So a cost of, say £100,000 including VAT, £16,667 input VAT reclaimed. 2 years later, MV, not easy to determine, say £60,000.

So final output VAT on deregistration £12,000?

The structure isn't bricks and mortar, but certainly more than a glorified shed. Think one of those of wooden construction, properly insulated with loo & mini-kitchen.

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