First and foremost, the UK boasts of having the highest VAT registration threshold in the EU and OECD. According to government figures, the £85,000 threshold means around 3.55 million small businesses avoid having to be VAT registered. Businesses that are registered for VAT can apply for VAT deregistration, if their annual turnover falls below the VAT deregistration threshold.
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What is VAT Deregistration?
VAT deregistration is allowable at any time if your business falls below the deregistration threshold, or if you expect taxable sales to fall below the threshold. Note that it is not always in the interest of a business to remain VAT registered and there may be circumstances in which deregistering for VAT might be a wonderful alternative.
Ideally, if your business has seen turnover drop below the deregistration threshold, it may be advisable to consider deregistering from having to pay VAT, unless the VAT you are able to claim on purchases makes it feasible to remain VAT registered. It is important to consider your business, turnover and all surrounding circumstances before you make a decision. If you aren’t sure of the implications for your own business and situation, it’s wise to seek professional advice.
When Can You Deregister for VAT?
In the UK, you are permitted to request a voluntary deregistration if: You can satisfy HMRC that your taxable turnover over the next 12 months won’t exceed the deregistration threshold, or; You close down a section of your business and are able to satisfy HMRC that your taxable turnover for the rest of the year will not exceed the deregistration threshold.
Have it in mind that you can voluntarily deregister for VAT if your income falls below the de-registration threshold, but there also situations where it is compulsory for a business to Deregister. You will only be able to deregister if you believe your turnover for the next 12 months will fall below the threshold.
If you request a voluntary deregistration, HMRC will likely to want to know why you think your turnover will fall below the £83,000 threshold. You might also be asked to provide your projected turnover over the next 12 months. De-registering for VAT does have implications which you should be aware of; the most immediately significant for business owners being the potential for a high final VAT bill.
You may have to account for VAT on the value of certain business assets and stock on hand at the time of deregistration. You would not have to account for VAT if the value of these assets and stock is £1,000 or less. However, as you have indicated you are holding stock worth over £3,000, this exemption would not apply.
Assets such as tangible goods (e.g. unsold stock, plant, furniture, commercial vehicles, computers) should be included in the de-registration valuation if you claimed the VAT back when you purchased them. You would not have to include intangible assets like patents, copyrights and goodwill. You also do not have to account for VAT on items that VAT was not reclaimed on.
Depending on the circumstances, the value of land and property may have to be included when calculating how much VAT is payable on stock and assets on hand at the time of deregistration. When it comes to deciding how to manage your business affairs, there are advantages and disadvantages to deregistering VAT.
Advantages of Deregistering
- You can maintain your VAT inclusive prices, if your customers are happy to continue paying the same price and doing so won’t take you over the threshold again
- You could attract more customers by charging less than your VAT registered competition
- No need to submit VAT returns
- No need to keep your accounts up to date on a quarterly basis
- You no longer need to obtain VAT receipts
Disadvantages of Deregistering
- No ability to claim back VAT on purchases
- Since there is no reason to keep your accounts organised and up to date, you may allow your accounts to go unmanaged making it a time-consuming job when you can no longer put the job off
- You’ll need to monitor your income on a monthly basis to make sure you don’t creep over the VAT registration threshold
- You could lose out on business from larger organisations because they think you are too small
Step by Step Guide on How to Deregister from VAT in the UK
There are situations in which you need to deregister your VAT registration. This VAT Deregistration can be voluntary or compulsory. A vender’s VAT registration may be cancelled if certain requirements are not fulfilled. The process of VAT Deregistration is as follows:
Application for the cancellation process
The very first step of VAT Deregistration is to get the application for the cancelation process. A person or a company needs to fill and submit VAT 123e – Application for the cancellation of registration of a person in respect of all his enterprise’s form. Have it in mind that this application needs to be submitted to the SARS branch where the company is registered. The reasons why this deregistration is taking place should be mentioned on the form.
Get your letter of acknowledgement
Once you have submitted the application, the commissioner will issue a letter of acknowledgment for the company or vender. This letter will contain all the information regarding the date of cancellation and the final tax period. It will also provide the further instructions on the cancellation process. The vender or the company needs to charge the required amount of VAT on the products and services until the completion of the deregistration process.
Declare output Tax
As mandated by the commissioner, in the final tax period, the vender or company is expected to declare output tax in field 1A of that VAT return. Exit VAT, which is the amount of tax on the goods in hand at the time of cessation, must be collected together with the addition of other output taxes.
If you are applying for voluntary VAT Deregistration, you will have to provide HMRC with the responsible factor for the decrease in your company’s turnover. Once the VAT Deregistration process is complete, you need to register your company again if the annual turnover exceeds the limit.
While it may seem an obvious decision to increase savings by deregistering VAT if your turnover falls below the limit, caution is advised and you should take professional advice before proceeding. Once you have applied for VAT deregistration, you should expect to wait around three weeks for HMRC to confirm and send you an official cancellation date.
This date will either be when your cancellation took effect (e.g. when your business ceased trading), or the date you requested in the case of a voluntary deregistration. If you are being forced to deregister for VAT through compulsory deregistration, HMRC may allow the registration to remain open for up to six months to allow time to tie up all the loose ends.
You can apply online or via a written form in the mail. If you apply for deregistration online, HMRC will send confirmation to your VAT online account. You must stop charging VAT and retain your VAT records for six years from the date of cancellation.