If you have voluntarily registered for the VAT (Value Added Tax), then it is mandatory for you to maintain digital VAT returns and submit the same against the periods starting from April 2022 or later. Fortunately, the good side of the picture is that there is an option of deregistration for those who have voluntarily registered themselves; however, this option also comes with a couple of pitfalls; before opting for de registration, you should consider them.

In this article, our tax specialists will walk you through these pitfalls.

All You Need to Know about VAT Deregistration

The pandemic has hit all sorts of businesses alike. As a result of continuous and prolonged lockdowns, several businesses have witnessed very low turnovers or ceased to exist altogether. In many cases, the option of de registration is open for businesses that have suffered from permanent loss of turnover.

De registration may seem an attractive option. However, it may become a headache due to the presence of hidden and forgotten traps in the legislation. Let’s discover them!

De registration Limit

You can pursue the option of de registration only if you expect taxable sales in the 12 months of your business to remain below the £83,000 limit. At present, the MTD (Making Tax Digital) registration threshold stands at £85,000. The government is mulling over freezing the current MTD registration and de registration limits till 2024.

It is pertinent here to mention that the de registration threshold includes reduced-rated and zero-rated incomes while it does not include sales outside the scope of VAT, such as exempt sales.

Pricing Trap

The pricing trap section requires an example for crystal-clear understanding.

Suppose you run a juice business with annual sales reaching £90,000 (including VAT). When VAT is axed, the turnover figures plummet to £75,000,well below the de registration limit of £83,000. Now when opting for de registration, you have to reduce your prices so that you can pass VAT savings to your clients.

If you don’t pass on the VAT savings to your clients by cutting your prices, your sales will remain well above the threshold, and in such cases, de registration is never a good business.

MTD De registration: Stock and assets

While de registering for MTD, you have to declare any VAT due on your final self-assessment returns. However, there is some good news:

  • You don’t have to pay any output tax on exempt or zero-rated items.
  • When de registering, you can ignore any assets or stocks where input tax wasn’t claimed when they were purchased.
  • HMRC calculates the output tax of the item as per its market value on the day of de registration. Items depreciate, and hence, you have to surely pay output tax at a lower figure (when compared with the price on which the asset was purchased).
  • After all the exclusions, such as depreciation, if the value of the VAT payable is below £1,000, you won’t pay any output tax.
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MTD De registration & Property Warning

Another downside of MTD de registration is that businesses often forget about non-residential properties they own, specifically about the property of whom the business has made past options to tax election to HMRC. If this is the case, then you should ponder over the following:

  • If the business had not claimed input tax and had not paid VAT on the purchase of property that is either less than 3 years old or because the vendor opted to tax, then you can de register for MTD without having any output tax liability on your final return. However, if the answer is yes, the business must pay output tax on the market value.
  • Likewise, if the business has opted to tax its interest in the property, output tax will be due on the property’s market value. If the business hasn’t, your final returns will have no output tax liability.

B2C Services Post Brexit

Post-Brexit, the change to the UK from outside the EU since 1st January 2021 has made several businesses outside the range of the UK VAT. Thus it provides a golden opportunity to de register.

You will have the de register opportunity if you are selling or providing B2C (business to consumer) services to EU customers after 1st January 2021.Likewise, there is a list of professional B2C services that are beyond UK VAT if the customer is based outside the UK and the customer’s country becomes the place of supply.

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