What is VAT Deregistration? Rules, Thresholds & Process Explained

Businesses may cancel their Value Added Tax (VAT) registration when they are no longer required to remain registered. When a business cancels its active VAT registration with a tax authority, it is called VAT deregistration. Typically, it is done when businesses permanently stop trading or making taxable supplies, or join a VAT group. This guide explains when you can deregister for VAT in the UK, and how the financial thresholds work. It also outlines the steps you need to take to exit the VAT system with ease.

What Does VAT Deregistration Mean?

VAT deregistration means cancelling VAT registration and removing the business from the VAT system. Once a business is deregistered, it does not need to charge VAT on its sales or submit VAT returns to HM Revenue and Customs (HMRC). In the UK, businesses may consider deregistering for VAT if they no longer meet the requirements for VAT registration. Businesses also cancel their VAT registration when remaining VAT-registered is no longer beneficial for them. Cancelling VAT registration can reduce administrative work and simplify tax reporting. Additionally, businesses must cancel VAT registration if they stop making taxable supplies or close their business. You may apply for voluntary VAT deregistration if you expect your taxable turnover in the next 12 months to be £88,000 or less. Deregistration may help keep your prices more competitive if most of your customers are not VAT-registered and cannot reclaim VAT.

Is It Possible to Deregister VAT?

Absolutely, you can deregister for VAT in the UK if your business is no longer required to be VAT-registered. For instance, if you stop trading or your taxable turnover falls below the VAT deregistration threshold, you can cancel your VAT registration. To cancel your VAT registration, you must apply to HMRC.

When Can I Deregister For VAT?

Deregistration falls into two categories: voluntary and compulsory.

Voluntary Deregistration

You may apply for voluntary VAT deregistration if you expect your taxable turnover for the next 12 months to be £88,000 or less. Moreover, if you no longer find it necessary or beneficial to be registered for VAT, you can voluntarily deregister. For example, when most of your customers are not VAT-registered and cannot reclaim VAT.

Compulsory VAT Deregistration

Cancelling VAT registration is mandatory in some cases. For example, if you stop providing taxable services or making taxable sales, VAT deregistration becomes mandatory. HMRC generally requires VAT deregistration when you stop trading or cease making taxable supplies. If you sell your business, the VAT treatment will depend on how the sale is structured. You must cancel your VAT registration within 30 days, or you might be charged a penalty. If you want to learn more about VAT on digital products, read our blog on VAT on digital products and services.

How Do I Deregister VAT from HMRC? Key Steps

In the UK, to deregister for VAT, you must apply to cancel your VAT registration through your HMRC online account. Here are the steps to take when deregistering for VAT:

• Check your Eligibility

Before VAT deregistration, you must check your eligibility. If you stop trading or providing taxable services, you must deregister for VAT. You can choose to deregister voluntarily if you expect your taxable turnover to fall below £88,000.

• Submit Your Application

Apply online through your HMRC VAT account. Alternatively, you can also complete the appropriate HMRC form VAT7 if online VAT deregistration is not available.

• Stop Charging VAT

HMRC will contact you to confirm your cancellation. Once it confirms your deregistration date, you must stop charging VAT on sales made after that date.

• Account for Remaining Assets

You must account for any assets or stocks you have if:

• You reclaimed or could have reclaimed VAT when you bought the assets
• The total VAT due on these assets is more than £1,000

• Submit the Final Return

Before VAT deregistration, you may need to submit one final return to clear outstanding liabilities. Make sure to file any outstanding VAT returns and settle any VAT payments before your deregistration is finalised.

• Retain Your Record

You must keep all the VAT records to avoid incurring fines when authorities conduct an audit on your business. Legally, you must keep all past VAT records and invoices for 6 years. You can also check the official HMRC website for more details on cancelling VAT registration.

What are the Advantages and Disadvantages of VAT Deregistration?

Although deregistering from VAT can be helpful in some situations, it is sometimes preferable to retain your firm’s VAT registration. Indeed, it reduces paperwork, but exiting the VAT system can negatively impact your cash flow and business reputation.

What are the Benefits of VAT Deregistration?

Here are some of the benefits of cancelling VAT registration:

Reduce Paperwork

Deregistering VAT simplifies the tax compliance requirements. You no longer need to submit VAT returns, calculate VAT on sales and purchases, keep VAT records, or deal with VAT inspections and compliance issues.

Simplified Accounting

With VAT deregistration, you only need to track regular income and expenses, simplifying accounting processes.

Relief From HMRC Tax Penalties

In case of VAT errors, HMRC enforces penalties. By deregistering, you remove the risk of late submission penalties and fines for accidental bookkeeping or calculation mistakes on a VAT return.

Cost Savings

In most jurisdictions, small businesses are not required to account for VAT on every transaction. This potentially saves them thousands in administrative costs.

What are the Drawbacks of VAT Deregistration?

There are some disadvantages of deregistration of VAT, such as:

You Cannot Reclaim VAT

Once you deregister, you cannot claim the VAT you pay on business expenses. This increases your costs for raw materials, tools, subscriptions, and utilities.

Tax Bills on Remaining Assets

If you hold stock or assets on your final day of registration, you must pay HMRC the VAT due on them. You escape this bill if the total VAT due on these remaining assets is less than £1,000. But if it exceeds £1,000, you must pay the full amount on your final VAT return.

Compromise B2B Relationships

VAT deregistration may negatively impact your clients. If your client is a VAT-registered business, deregistering offers little or no competitive advantage to them.

Growth Restrictions

Voluntary deregistration requires your turnover to stay below £88,000. To remain below this threshold, you may find yourself turning down new work or capping your growth.

How Quickly Can You Deregister From VAT in the UK?

Usually, HMRC takes several weeks to process an online VAT deregistration application. However, the speed of the process depends on the method you use to apply and the reason you are cancelling. If you cancel your VAT registration through the post, it may take some time, but if you are using an online method, it takes less time. To confirm your cancellation, HMRC normally confirms VAT deregistration after reviewing your application, although processing times can vary. However, it may take longer during busy periods.

The Bottom Line

VAT deregistration can save your business substantial administrative time. It may also lower your prices for everyday consumers. However, before cancelling VAT registration, it is vital to understand the full picture. While cancelling VAT registration reduces administration, it can affect your cash flow, business reputation, and pricing. Furthermore, it increases tax bills on assets, and you cannot claim VAT. This can quickly wipe out expected savings. It is important to review your rolling 12-month turnover figures and consult a tax professional. Need qualified professionals to manage your accounts? We are here to assist. At MicroEntityAccounts, we have qualified, UK specialist accountants who handle your finances while ensuring compliance with HMRC. Contact us and get accurate tax calculations to avoid unnecessary HMRC fines. Disclaimer: The information provided on MicroEntityAccounts.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.