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.
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).
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.
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.
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.
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.