Effect of VAT Deregistration

Where your business deregisters it can trigger hidden VAT charges. What are they and what steps can you take to avoid them?

Unregistered advantage

Not having to add VAT to their prices can give non-registered traders a competitive edge in the market, mainly where they are selling to the public or other businesses that can?t reclaim some or all of the VAT they pay on purchases. Alternatively, they keep their prices the same and increase their profit by keeping the amount they would have had to pay over to HMRC. But if your business turnover is below the deregistration limit, currently £81,000, you need to watch out for one or two things before actually deregistering.

Temporary deregistration pitfalls

If the VAT on the current value of the business assets, e.g. stock and equipment, at deregistration is more than £1,000, it has to be repaid to HMRC. This extra cost could wipe out any potential savings from deregistering from VAT unless the deregistration is going to be permanent. This trap is particularly significant where capital goods are involved.

Capital goods

The capital goods scheme (CGS) applies to the purchase of land or buildings and the refurbishment or extension of existing buildings where the cost is more than £250,000 and you?ve reclaimed VAT on it. If you deregister from VAT within a ten-year period (the ?adjustment period?), you?ll have to repay some of the VAT you originally reclaimed.


Example. Mr and Mrs Fawlty bought a small seaside hotel in 2010, when the VAT rate was 17.5%, for £400,000 and the previous owners had opted to tax it, i.e. decided to charge VAT on the sale. This meant the total sale price was £470,000. But because the Fawltys were running a VAT-registered business on which all the supplies they made were chargeable to VAT, they were entitled to reclaim all of the £70,000 VAT they paid on the property. So far so good.


Turnover trouble

The Fawltys? turnover was originally about £100,000 per year but has fallen slowly; their turnover is now only £62,000. They are considering deregistering but keeping their prices the same to increase their profits by £10,333, i.e. turnover of £62,000 x 20/120 = a saving of £10,333.

Trap. Once deregistered they wouldn?t be able to reclaim input VAT on purchases and this would eat a little into their saving.

The ten-year catch

If they deregister now, the CGS will mean that they will be treated as having sold the hotel which would be an exempt supply in year four of the CGS ten-year adjustment period, resulting in a clawback of VAT of £42,000 (£70,000 x 6/10 (60%)).

Deregistration disincentive

The Fawltys would be extremely unhappy to find that they owe HMRC £42,000 on the property, let alone VAT on the value of stock, fixtures and fittings in the business. Based on this, they would be much better off to remain registered.

Tip. Take into account VAT due on deemed supplies of assets the business owns. You could reduce this by running down stock and waiting out the CGS period.