If you’ve built up a great Company that’s doing well then the chances are you’re paying VAT. It might seem like a taxation on the successful business (because in theory it is) but it’s also a sign that your Company has moved from just scraping by to one that’s now generating a good income and putting back money into the UK.
However, paying VAT comes with downsides. The main one is obviously adding 20% to the cost of your products and services. The challenging time for many Companies with this is when you’re just over the VAT threshold, and thus charging 20% more than most of your competition in a price sensitive market.
Pete’s T-Shirts has a great year and goes from £70,000 turnover to £90,000. This is a 23% increase in sales and something to celebrate, but there’s a catch. Pete now needs to charge £12 + VAT for a T-Shirt as he went over the threshold.
Pete now becomes more expensive overnight and that could lead to losses in sales in a price sensitive market. This drop could in fact put him below the threshold (currently at £83,000) and he could find his business turnover fluctuates year on year if he stays in limbo with the VAT registration.
The answer for Pete could be to push far beyond this and become a Company taking way over the threshold so he can concentrate on more turnover (more T-Shirts) and decrease the price, but still make a good profit due to the volume.
However, some prefer not to do this. Many small businesses choose to stay below the threshold. Although this might seem very limiting on growth and not really the entrepreneurial spirit of a business owner, some are simply happy to be comfortable in business and that’s their choice.
However, what happens to Pete if he decides this is a better option, but he’s already VAT registered? Pete will need to de-register for VAT and, of course, try not to go over the threshold again.
Here’s how Pete (and you) could Deregister for paying VAT
First of all your business must be below the £83,000 turnover threshold per year to qualify for deregistration. Deregistering from VAT can only take effect from a current or future date. You can’t backdate even if you made an error in registering for VAT in the first place.
You apply to HMRC to deregister and they will look at and accept the application if and when it applies to your Company – basically if your turnover is expected to fall below the VAT registration threshold.
Assets held on Deregistration
When you deregister for VAT then you’ll need to take into account any assets your business has, like computers, cars, or other equipment owned by the Company. There might be a VAT liability to pay as those are assets.
There are a few ways to reduce or eliminate this potential VAT liability though:
- The VAT payable on your assets is based on their market value on the date of deregistration and it takes into account depreciation as well as whether the item is of use or is in fact now obsolete in the business.
- VAT isn’t liable if the asset wasn’t bought from a VAT registered business or the VAT wasn’t claimed at the time of purchase.
- No output VAT is payable on the value of the asset if it’s zero-rated or exempt from VAT.
- No output VAT will be due on intangible assets, such as patents or copyright.
- And no VAT is payable on deregistration when the value of all the assets amount to less than £1,000.
On your final VAT return before you deregister your business, you must account for VAT on unpaid sales invoices, and this affects you even if you’re using the cash accounting scheme.
You can also claim for input VAT on unpaid purchase invoices, and you can claim input VAT on your purchase invoices dated after deregistration as well, as long as they relate to the period your business was registered for VAT.
Flat-rate Scheme (FRS)
Where your business has been using the VAT flat-rate scheme (FRS), it’s deemed to leave that scheme the day before the VAT registration is cancelled.
So, if you deregister for VAT at the end of January, you’ll leave the scheme on the 30th and be deregistered on the 31st.
- You need to invoice any outstanding invoices in January, in the old VAT period.
- Any business purchases made in January will fall inside that VAT period.
- Once February rolls in you won’t be able to claim VAT back on purchases.
- And you won’t be able to charge VAT on your invoices.
To apply for VAT Deregistration
You can apply for the cancellation of your VAT registration online with HMRC by logging into your VAT online account (Government Gateway account) or you can fill in and send form VAT7 instead.
You can, of course, ask us, or your Accountant, to do it for you. This is recommended as we do have a way of getting better answers and responses from them.
When would you need to deregister for VAT?
• Voluntary deregistration: You decide to keep your business below the threshold or it becomes obvious that due to a change in the business (like a partner leaving) that you will turn over far less next year.
• Compulsory deregistration: You go bankrupt or cease trading. In this case you will have to deregister for VAT by law and this will come into effect on the final day of trading.
• Change of business structure: If your business changes and one of the Directors leaves and you decide to change to a sole trader and you turn over less than the £83,000 threshold, you will want to deregister for VAT.
The VAT threshold is due to stay unchanged for 2018 / 19, but it could change thereafter, so it’s worth keeping an eye on this in upcoming budgets.
It’s a worthwhile conversation to have with your Accountant about the options you have.
For some, especially those right on the threshold, it can be a tricky decision to opt for growth or to play it safe and stay below. It’s your choice to stay below the threshold, but not if you go above it.
For more help and advice please do contact us at Chandlers CA.