Request a
call back
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 UK VAT deregistration for those who have voluntarily registered themselves; however, this option also comes with a couple of pitfalls; before opting for deregistration, you should consider them.
In this article, our tax specialists will walk you through deregister for VAT UK pitfalls.
Why Deregister for VAT?
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!
Key Considerations for UK VAT Deregistration
1. Deregistration Limit
You can pursue the option of deregistration only if you expect taxable sales in the 12 months of your business to remain below the £88,000 limit.
At present, the VAT registration threshold stands at £90,000. The government is mulling over freezing the current VAT registration and deregistration limits till March 2026. This policy aims to provide stability for small businesses regarding VAT compliance.
Essential to Note
- The de registration threshold includes reduced-rated and zero-rated Sales.
- It does not include sales outside the scope of VAT, such as exempt sales.
2. Pricing Trap
When you deregister you are no longer required to charge VAT on your goods or services. However this can create a pricing challenge. The pricing trap section requires an example for crystal-clear understanding.
Example
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 £88,000. 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, deregistration is never a good business.
3. Deregistration: Stock and assets
While deregistering for MTD, you have to declare any VAT due on any stock or assets you hold 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.
4. Property Considerations
Another downside of VAT deregistration 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.
5. Post-Brexit Implications for B2C Services
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.
Seek Professional Advice
VAT deregistration may appear straightforward, but the hidden complexities can lead to unintended tax liabilities. Whether you are considering deregistration due to reduced turnover, changes in property holdings, or post-Brexit adjustments, seeking professional advice is essential.
Get Free Consultation From Tax Advisors at IBISS & CO
