VAT deregistration UK: Is it really saving your business money?

What VAT deregistration means

Deregistration means HMRC cancels your VAT registration, so you stop charging VAT and filing VAT returns. There are two kinds:

• Compulsory: you must tell HMRC within 30 days if you stop making taxable sales, for example because you stop trading, sell the business, change its legal form (such as from sole trader to limited company), or join a VAT group.
• Voluntary: you can ask to cancel if you expect your taxable sales in the next 12 months to be £88,000 or less.

Sales falling below the £90,000 registration threshold does not force you to deregister. It is your choice.

How to cancel your VAT registration

1. Apply through your HMRC business tax account, or on form VAT7.
2. HMRC confirms your cancellation date, usually within 40 working days. It is either the date the reason took effect, such as when you stopped trading, or the date you asked to cancel.
3. Keep charging VAT and keeping digital records until that date, then stop charging VAT.
4. File your final VAT return, covering the period up to the cancellation date, and pay any VAT due.

The costs people miss

VAT on stock and assets you keep

On your final return you must pay VAT on the stock and assets you still have, such as equipment, vehicles and computers, if you reclaimed VAT when you bought them. It is worked out on what they are worth now. If the total VAT is more than £1,000, you pay all of it. If it is £1,000 or less, you pay none.

For example, stock and equipment now worth £6,000 before VAT carry £1,200 of VAT. As that is more than £1,000, you pay £1,200 on your final return.

Large assets under the Capital Goods Scheme

If you bought land or buildings costing £250,000 or more, or computer equipment costing £50,000 or more, before VAT, you may need to make a final adjustment under the Capital Goods Scheme.

Losing the VAT you reclaim on costs

Once deregistered, you cannot reclaim VAT on anything you buy, such as software, equipment, fuel, rent or professional fees. For many service businesses this is several thousand pounds a year.

No price advantage with business customers

VAT-registered customers reclaim the VAT you charge them, so removing VAT does not make you cheaper for them. You only gain on sales to the public, where you can either lower your prices or keep them the same and keep the VAT you used to pay over.

When deregistering can save money

Deregistering tends to make sense when:

• Most of your customers are members of the public
• You have few costs with VAT on them
• You expect your sales to stay well under £88,000
• The VAT on your stock and assets is small, or under £1,000

Two worked examples

A marketing consultant expects sales of £70,000, almost all to VAT-registered businesses. It reclaims about £4,000 of VAT a year on software, equipment and travel, and its equipment carries £1,200 of VAT. Deregistering gains it nothing on sales, loses £4,000 a year in reclaimed VAT, and costs £1,200 on the final return: about £5,200 worse off in the first year.

A hairdresser expects sales of £70,000, all to the public, and reclaims about £1,500 of VAT a year. If it deregisters and keeps its prices the same, it keeps the £14,000 of VAT it used to pay over, less the £1,500 it can no longer reclaim: about £12,500 a year better off.

Your final VAT return and what comes after

• Final return: it covers the period up to your cancellation date and includes any VAT due on stock and assets in Box 1. It must be filed through Making Tax Digital software, like every other return.
• Deadline: HMRC sends you the due date, and it is shown in your VAT online account. File and pay by then. Do not wait for every invoice: you can still reclaim VAT on bills from before the cancellation date when they arrive.
• Records: keep your VAT records for at least 6 years.
• Services after deregistration: you may be able to reclaim VAT on some services received after you deregister, such as accountancy fees for your final return, using form VAT427.
• Registering again: you must register again if your taxable turnover goes over £90,000 in a rolling 12 months.

Questions to ask before you deregister

• How much VAT do I reclaim on costs each year?
• How much VAT is there on the stock and assets I would keep?
• Are my customers mainly businesses or the public?
• Is my turnover likely to go back over £90,000 soon?

Final thoughts

Deregistering cuts paperwork, but it often costs more than it saves for businesses that sell to other businesses or reclaim a lot of VAT. Run the numbers first. If you stay registered, filing your VAT return from a spreadsheet costs little; if you leave, your final return still needs MTD software.

Disclaimer: This guide gives general information, not advice for your business. If you are unsure how the rules apply to you, speak to an accountant or contact HMRC.