In the final article of this series on VAT registration, Neil Warren highlights some potential tips and pitfalls with deregistration.
Reasons for deregistering
A business will always deregister for one of two reasons:
1. Compulsory deregistration
The business has ceased to trade and has no intention of making future taxable sales. The deregistration date is the final day of trading, although there is scope on the deregistration form VAT7 to extend this date and therefore capture some final purchase invoices for input tax purposes, eg in relation to professional fees.
The business expects that its taxable sales in the next 12 months will be less than the deregistration threshold, ie £83,000, which has been the relevant figure since 1 April 2017. This is the key point with voluntary deregistration, namely that historic turnover is irrelevant and it is always about future sales.
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Remember that voluntary deregistration can only be requested from a current or future date: it can’t be applied for on a retrospective basis (VAT Notice 700/11, para 3.4).
Mike and Betty are VAT registered as a partnership trading as architects and have no employees. The total annual fees of the partnership are £120,000 and they both work full time in the business. On 31 July 2017, Mike decided to retire from active work and from then on Betty will be the only fee earner, Mike will be a sleeping partner.
All things being equal, expected sales in the next 12 months will be £60,000 so the business can deregister on 31 July 2017. This might be worthwhile if many clients are unable to claim input tax eg private individuals or business customers making exempt sales.
Output tax liability on assets
A big downside of deregistering is there may be output tax due on the final VAT return in relation to assets and stock which are still owned on the final day in the VAT club (VAT Notice 700/11, section 7).
However, there is good news that might avert a potential liability:
- No output tax is due on an asset if input tax was not claimed when it was purchased, eg a computer bought from a friend who is not VAT registered. The exception is when standard-rated goods were obtained VAT free as a result of taking over a business as a going concern.
- The output tax payable is based on the market value of the asset on the date of deregistration, ie it takes into account depreciation, damage to the goods, obsolescence etc.
- No output tax is due on goods that are zero-rated or exempt.
- No output tax is due on intangible assets eg goodwill.
- If the total of output tax calculated in respect of all assets and stocks comes to less than £1,000, it is a de minimis amount and no declaration is needed on the final return.
Mike and Betty from the earlier example deregistered from VAT on 31 July 2017. The partnership only has two assets:
- A car bought for £15,000 plus VAT a year ago, but no input tax was claimed because the vehicle was available for private use.
- An expensive computer system they purchased for £6,000 plus VAT in July 2016.
No output tax is due on the car because input tax was not claimed when it was purchased. With regard to the computer, applying a 25% rate of depreciation gives a market value of £4,500 + £900 VAT at July 2017. This is less than the de minimis VAT figure of £1,000, so no declaration is due on the final VAT return.
Post deregistration expenses
On its final VAT return, a business must account for output tax on unpaid sales invoices, even if it uses the cash accounting scheme. It can also claim input tax on unpaid purchase invoices (VAT Notice 731, para 6.12).
Once the final VAT return has been submitted, it is not too late to make a claim for business expenses. Form VAT427 can be used to claim input tax on purchase invoices that are dated after deregistration but relate to the period when the business was registered, eg accountancy fees.
Bad debt relief
What happens if some sales invoices are written off as a bad debt as they are not expected to be paid by the customer? The good news is that bad debt relief can be claimed up to four years after deregistration on the very useful form VAT427.
Tip: This form has to be completed in full online and then printed to be signed and submitted, so make sure you have all the information to hand before starting the process. A half-completed form can’t be saved.
Change of legal entity
If a business changes its legal entity, eg from a sole trader to a limited company, the sole trader business will deregister and the new entity will become registered on the same day.
There is a way for the new entity to retain the same VAT number as the previous owner, which is done by completing form VAT68 and submitting it to HMRC with the usual form VAT1.
The only downside is that the new entity is taking over the potential VAT liabilities of the previous owner, eg in relation to errors for the previous four years under the error correction rules.
This might create an unwanted VAT debt for the new owner, so a fresh start with a new VAT number is often the best route.
That’s it for Neil Warren’s series on VAT registration. You can view all four articles here. If you have anything you’d like Neil to cover in future do let us know in the comments below.