HMRC records that during 2023/24, VAT deregistrations outnumbered new registrations by approximately 35,000 – the vast majority due to the closure of the business. However, some businesses deregister because they are no longer required to be VAT registered. How and when a business can deregister and/or leave a particular scheme depends on the type of scheme.

The main VAT schemes are the standard accounting, cash accounting, annual accounting and flat rate schemes. In addition, various retail VAT schemes exist including VAT margin schemes (where instead of paying VAT based on the item’s selling price, the tax is based on the difference between the purchase price and the selling price).

A business must cancel its VAT registration if it ceases to trade or otherwise ceases to be eligible for VAT registration. Notification of deregistration is required within 30 days of ceasing to make taxable supplies, effective from the date of cessation or later, as agreed with HMRC. The business must continue to account for VAT until that date. However, voluntary registration is still possible if its taxable turnover is below the current cancellation limit of £88,000 so long as a taxable trade continues.

Cash accounting and annual accounting schemes

The joining threshold for both schemes is currently £1.35 million. HMRC does not need to be notified if the business leaves the cash accounting scheme but will need to be on leaving the annual accounting scheme. A business must leave either scheme at the end of any VAT period (a year in the case of the annual scheme) where the taxable sales for the previous 12 months have exceeded £1.6 million excluding VAT (although leaving the schemes voluntarily is possible at any time). If a business has taxable sales in excess of £90,000 it will remain within the VAT process, accounting for VAT using the standard accounting scheme.

Some businesses may temporarily exceed the leaving threshold and if so, they can remain within the scheme if they believe taxable sales in the next 12 months will be less than the joining threshold, i.e. £1.35 million excluding VAT. The ‘one off’ increase must not have happened previously and is not expected to happen again. IN addition, the sale must have arisen from a genuine commercial activity; again, HMRC is not required to benotified.

Annual accounting scheme

A business must leave the annual accounting scheme when turnover exceeds £1.6 million, irrespective as to whether the increase is temporary. Instalment payments will cease, and a final return is due for the shorter period. Payments are reconciled against payments already made, so that a balancing payment may be payable or a refund received. Leaving the scheme is not deregistration.

Flat rate scheme

A business can opt to leave the scheme voluntarily at any time but must leave if gross sales including VAT have exceeded £230,000 on the anniversary date of joining the scheme or there are reasonable grounds to believe that income for the next 30 days will exceed that amount (capital asset sales excluded). However, if total sales including VAT are expected to be less than £191,500 in the next 12 months, application can be made to remain within the scheme.

Practicalities

Many owners of deregistered businesses are unaware that they must account for output tax on stock and any assets on which VAT was claimed, which the business retains at the date of deregistration, and where the VAT due exceeds £1,000. VAT due on deregistration is effectively a deemed supply by the business to itself. The legislation treats relevant stock and assets as supplied immediately before cancellation.

When a VAT registration is cancelled, VAT can be reclaimed on goods or services that were supplied when the business was VAT registered but not included in a previous VAT return. VAT on any services supplied after the VAT registration was cancelled can also be reclaimed if they were connected with the taxable activities (e.g. accountancy fees relating to when the business was VAT registered). Bad debt relief may also be possible on goods or services supplied when the business was VAT registered (this claim must be made within four years and six months, at the end of the accounting period). There is an online form to use for such a reclaim.

Practical point

Deregistration is not always beneficial. Deregistration may leave the business unable to recover input VAT, and VAT-registered customers may prefer to deal with a registered supplier.