A Guide to Deregistering for VAT in the UK
Value Added Tax (VAT) is a significant part of the tax system in the United Kingdom. Businesses must register for VAT if their turnover exceeds the threshold set by HM Revenue and Customs (HMRC), which is currently £90,000. However, there are circumstances when a business might want or need to deregister for VAT. This guide will walk you through the process, the reasons for deregistration, and the implications of doing so.
Why deregister from VAT?
Deregistering from VAT can be beneficial under certain circumstances, but it's essential to make this decision strategically:
- Falling below the VAT threshold: If your business's turnover falls below the VAT deregistration threshold (currently £88,000), you can voluntarily deregister. This might be beneficial if your turnover remains consistently low, as it reduces the administrative burden.
- Business changes: Changes in your business structure, such as incorporating a sole trader business, merging with another entity, or significantly changing your business activities, might necessitate or make it advantageous to deregister.
- Ceasing to trade: If your business stops trading or no longer engages in taxable activities, you must deregister for VAT. This is a mandatory requirement by HMRC. It’s crucial to deregister promptly to avoid unnecessary administrative burdens and potential penalties for failing to comply with VAT regulations.
When can you deregister?
You can apply for VAT deregistration immediately if you expect that your sales will not exceed the deregistration threshold of £88,000 in the next 12 months. It's important to maintain accurate records to support your application.
The deregistration process
Step 1: Check eligibility
Before starting the deregistration process, ensure you meet the criteria for deregistration. Your turnover should be below the deregistration threshold, or you should have another valid reason, such as ceasing trading. It's also advisable to review your financial projections to ensure that your turnover will not exceed the threshold again soon after deregistering.
Step 2: Notify HMRC
You can notify HMRC of your intention to deregister online through your Government Gateway account. You need to complete the VAT7 form if doing it by post. Provide details about your business, the reason for deregistration, and the date you wish to deregister. It’s important to choose the correct date as it will determine your final VAT obligations.
Step 3: Final VAT return
After submitting your deregistration application, you will need to submit a final VAT return. This return should account for VAT on all sales and purchases up to the deregistration date. If you have any remaining stock or assets on which you have claimed VAT, you might need to pay VAT on them as if you had sold them. This process, known as self-supply, ensures that any benefits gained from reclaiming VAT on these items are balanced when you no longer operate under VAT regulations.
Step 4: Keep records
Even after deregistering, you must keep your VAT records for at least six years. This includes VAT invoices, receipts, and any correspondence with HMRC. These records are crucial in case HMRC needs to review your past VAT transactions or if you are audited.
Implications of deregistering for VAT
While there are good reasons for VAT deregistration, it’s important to consider all the drawbacks as well as benefits before going ahead.
No VAT charges
Once deregistered, you can no longer charge VAT on your sales. This could make your products or services cheaper for customers who are not VAT-registered. However, you will also not be able to reclaim VAT on your business purchases, potentially increasing your costs. This change can significantly impact your pricing strategy and competitive positioning in the market.
Simpler administration
Deregistering reduces the administrative burden, as you will no longer need to submit VAT returns or maintain detailed VAT records. This can free up time and resources for other aspects of your business. For small businesses or sole traders, this can lead to substantial savings in both time and money spent on accounting services.
Impact on cash flow
Consider the impact on your cash flow, especially if you frequently reclaim more VAT than you pay. Losing the ability to reclaim VAT could affect your overall profitability. Businesses need to reassess their financial planning and budgeting to account for these changes and ensure that cash flow remains stable.
Changes in pricing
Review your pricing strategy post-deregistration. If your customers are primarily VAT-registered businesses, the inability to reclaim VAT on their purchases from you might affect their willingness to pay the same prices. You might need to adjust your prices or offer alternative incentives to retain your customer base.
Market perception
Deregistering from VAT might also influence how your business is perceived in the market. Some customers may view VAT registration as a mark of a more established business, and deregistering could affect this perception. Therefore, it’s important to communicate the reasons and benefits of your decision clearly to your clients.
Conclusion
Deregistering for VAT can be a straightforward process if you understand the requirements and implications. Whether driven by reduced turnover, business changes, or a desire to simplify administration, it’s crucial to evaluate the financial and operational impacts on your business. Always consult with a tax professional or accountant to ensure you make an informed decision that aligns with your business goals.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
Frequently Asked Questions
What happens if I fail to cancel VAT registration on time?
Failing to cancel your VAT registration within the 30-day window can lead to penalties from HMRC, underscoring the significance of acting promptly.
Can I keep my existing VAT number if I transfer my VAT registration?
Yes, you can keep your existing VAT number when transferring your VAT registration to another legal entity.
What are the consequences of re-registering for VAT after cancellation?
If you voluntarily re-register for VAT, you'll receive a new registration number. If HMRC automatically re-registers your business, you must retroactively account for any VAT that should have been paid. Be prepared for potential retroactive VAT liabilities.
How long must I keep VAT records after deregistering?
After deregistering, you must keep your VAT records for six years.
Is it better to reduce prices or increase my margin after VAT deregistration?
It depends on your business goals. Assess your competitive landscape and financial health to make an informed decision about whether to reduce prices or increase your margin after VAT deregistration.
