We are writing this guidance in the context of Coronavirus during winter 2020 but the principles hold at all times.
Generally VAT Registration is required when rolling twelve month turnover exceeds the threshold, currently £85,000 (2020/21). Points to watch for:
- Turnover is on a rolling 12 month basis, checked at the end of each month by looking back 12 months. It is not simply accounts year, tax year or calendar year.
- If your turnover has increased temporarily and will reduce again shortly, eg one major one off contract, then it is normally possible to gain exception from registration.
But what happens when turnover falls again and you start to think about VAT De-Registration. This isn’t so straight forward.
There is a De-Registration threshold of £83,000 (2020-21). This is measured on VAT exclusive turnover.
- VAT exclusive turnover is the figure after VAT is taken out
- EG if you are a retailer / Business to Consumer business not separating VAT out in pricing – then suppose your total takings were £100,000. As this figure is VAT inclusive, it needs to be grossed down at 100/120ths to get a VAT exclusive turnover of £83,333 – and this figure, £83,333 would be the relevant test
- EG if you have a Business to Business operation or Business to Consumer business but you charge vat separately – then suppose your sales were £80,000 plus VAT £16,000 = £96,000 gross. The relevant figure for de-registration would be £80,000
The Turnover De-Registration Problem
The major issue around De-Registration is if your turnover increases once you have de-registered.
- You are a retailer and your total takings were £90,000. If you gross this down it is £75,000 – well below £83,000.
- However if you then VAT De-Register and your turnover remains unchanged then your turnover for VAT registration is £90,000 – well above the VAT registration threshold
- HMRC will not allow De-Registration in these circumstances unless you (a) reduce your prices or (b) show that your turnover will continue to decrease and be below the threshold
- You are a builder working for a mixture of business and private households. You add vat on to your invoices.
- Your turnover is now £80,000 a year, on to which you add £16,000 vat making £96,000.
- On the face of it, this means you can de-register as your VAT exclusive turnover is below £83,000. There is merit in doing this, as adding VAT on makes you uncompetitive when working for private households.
- However if you will now be able to charge private households a little more because VAT is no longer an issue, then you may soon find your turnover is over £85,000 Registration threshold again.
Section 3.2 of VAT Notice 700/11 is relevant to De-Registration on ground of reduced turnover, and says:
You can ask for voluntary VAT registration cancellation if any of the following occur:
- you can satisfy HMRC that your taxable turnover in the next 12 months will not exceed the VAT registration cancellation limit
- you close down part of your business and you satisfy HMRC that your taxable turnover for the remainder will not exceed the VAT registration cancellation threshold
- your turnover exceeds the registration limit but your taxable supplies are wholly or mainly zero-rated – if you make any standard-rated supplies, you can only cancel your VAT registration voluntarily if your input tax normally exceeds your output tax
If you’re requesting voluntary VAT registration cancellation on turnover grounds, you’ll need to tell HMRC why you think your turnover is going to fall below the VAT registration cancellation limit. You may, for example, have reduced your opening times, lost contracts, or changed your business practices. You should also tell HMRC what you expect your turnover will be in the following 12 months.
When you’re calculating your turnover, you should do it on a VAT-exclusive basis.
If your VAT-exclusive turnover is below the VAT registration cancellation limit then HMRC may allow you to cancel your registration, providing, you can satisfy HMRC that you’ll stop charging VAT, or if you’re a retailer, you can satisfy HMRC that you’re going to reduce your prices by the VAT element.
If HMRC is not satisfied that,you’ll stop charging VAT, or if you’re a retailer, you’ll reduce your prices by the VAT element then HMRC will not agree to your request to cancel your VAT registration.
This is because, once VAT is added to the VAT-exclusive figure you calculated, your turnover will exceed the VAT registration cancellation threshold.
Other Reasons for De-Registration
There are other reasons for de-registration, for example:
- Ceasing to trade – when you must cancel your registration (unless its a temporary or seasonal cessation)
- Change in the VAT liability of your supplies
The HMRC guidance above covers these circumstances
Stock and Assets in Hand
When you De-Register you may need to pay VAT on stocks and assets in hand.
HMRCs guidance is at Section 7 of VAT Notice 700/11
7.1 What you have to do about your stocks and assets
When you cancel your VAT registration, you usually make what is known as a deemed supply of the goods you have on hand.
This means you may have to account for VAT on some of your business assets and stock on hand, depending on:
- what they are
- how you obtained them
- why you’re cancelling your registration
You will not have to account for VAT if the total VAT due on the assets would be £1,000 or less.
7.2 What you must include
You must include assets such as:
- interests in land (but only if they would be taxable if you sold them, for example, where an option to tax has been made)
- tangible goods (for example, unsold stock, plant, furniture, commercial vehicles, computers) on which you claimed VAT when you bought them
You do not have to include intangible assets such as patents, copyrights and goodwill.
7.3 What you can exclude
You do not have to account for VAT on any items on which you did not claim VAT when you bought them. Examples include:
- goods you bought from unregistered businesses or private individuals
- cars (except private taxis, self-drive hire cars and driving school cars on which input tax has been claimed)
- goods you bought under a VAT margin scheme
- goods you’ve used wholly for business entertainment
- goods which you’ve directly attributed to an exempt business activity (unless some input tax relating to these goods was reclaimable through the partial exemption rules)
- land or buildings which you obtained free of VAT, even if you’re using them to make standard-rated supplies (such as holiday accommodation or because you’ve opted to tax the property)
- goods you did not buy for business purposes