Escaping the need to pay VAT might seem like an attractive thought for many small business owners but there are a few things to consider before you decide to make that decision. We are always here for our clients when it comes to saving money, so deciding when to de-register is key.
What qualifies or requires you to de-register from VAT?
- If your turnover has gone under the £83,000 threshold and it is expected to be that way for the next 12 months.
- Your business has ceased to trade and has no intention of making future taxable sales.
- If you are no longer making taxable supplies.
- If you join a VAT group.
- You are not, and never had been, liable to register for VAT (registered voluntarily).
When must you de-register from VAT?
You must inform HMRC to cancel your registration within 30 days if you stop being eligible, a person who fails to provide notification may be subject to a penalty under the Section 69 of the VAT ACT 1994.
It is compulsory to de-register from VAT if you have:
- Ceased to trade and have no intention of making future taxable sales.
- You have sold your business.
- Your business has joined a VAT group (or a VAT group is disbanded).
- The legal status of the business changes e.g. sole trader incorporates their business.
In the case of the legal entity changing or the business sells, the new owner can retain the previous owner’s VAT number but the main disadvantage is that the buyer takes over the VAT liabilities and potential VAT errors of the seller for the last four years, so it is wise to start with a new VAT number.
Voluntary de-registration from VAT
A business can decide to de-register at any time if taxable sales fall under £83,000.
When considering whether you will be trading below the de-registration threshold you will need to consider the tax-exclusive values. If the net is below the threshold then HMRC needs to be reasonably satisfied that:
- You will not include some or all of the value of the VAT in the gross value of the future supplies
- In the case of retail, they will reduce their prices.
If you do not intend on reducing the gross price you will have to provide further evidence to reduce turnover before HMRC can allow de-registration, without such reduction your future turnover may exceed the registration threshold.
If the tax turnover does exceed the threshold, HMRC may still allow de-registration as long as you can satisfy that the turnover will drop due to other factors, for example, reduction in opening hours or you lose a large contract.
Output tax on assets and stock
At the time of de-registration, a business must pay output tax on the assets and stock it owns.
The figure is at the market value of the assets, so the calculation takes in to account wear and tear and damage to these items.
Lots of these items can be omitted e.g. zero-rated, exempt, donated or patented items. output tax is only payable if the market value is more the £5,000 (VAT exceeds £1,000).
Stock and asses are excluded if no input tax was claimed when they were purchased e.g. a computer that was donated or given from a friend or the supplier was not VAT registered
Output tax is declared on the final VAT return on all relevant stock and assets if the £5,000 limit is exceeded, not just the value above the £5,000 limit. example if the relevant assets are £6,000 the output tax will be £1200 rather than £200.
Things to consider:
The most significant points to consider for business owners is the potential for a high VAT bill when de-registering.
These are the main things to be aware of:
- You may have to account for the VAT on certain business assets and stock if the VAT value exceeds £1,000.
- Assets such as tangible goods example unsold stock, plant, commercial vehicles should be included in the de-registration valuation.
- Depending on the circumstances the value of land and property may have to be included when calculating how much VAT is payable, for example, if you have a standard rated property and have had to reclaim at some point, this may create a large VAT bill.
- De-registration also brings any remaining capital goods scheme calculation to fruition on the final return and can create a large VAT bill, this applies to certain items purchased during the VAT registration period and VAT has been recovered on them.
- Once de-registered it is possible to still claim input tax and bad debt relief, provided it relates to the business during the time it was VAT registered.
There are many things to consider before deciding when to de-register and many factors to take into consideration, but at Diamond Accounts we are more than happy to assist you in choosing when is best for your business, especially if it is going to save you money on VAT
Come in and chat with us to find out more information on when the best time to de-register VAT is.