VAT Deregistration

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The actual process of deregistering from VAT is quite straight forward and all you need do is complete the VAT7 – Cancelling your VAT Registration form to start the ball rolling.  But there is much more to it than that and you should give as much thought and consideration to VAT deregistration as you did when you originally registered for VAT.  We have highlighted some of the major considerations below.

VAT Deregistration Considerations

VAT Deregistration Costs
VAT Deregistration Perception
VAT Deregistration Cashflow
VAT Deregistration Pricing
VAT Deregistration Admin
VAT Deregistration Validity

VAT Deregistration: The Costs

There are a couple of things to consider here, the first one being that if you employ the help of an accountant to help you through this process then ultimately it is going to cost you some money.  Whilst VAT deregistration is a process we feel most could complete themselves the timing is really important and so is getting it right.

VAT deregistration will mean you need to account for any VAT claimed on tangible assets of the business such as vans, stock or computers.  If the VAT due on these items is in excess of £1,000 then you will have to pay this over to HMRC.  This could be a major issue to your cashflow.  This is often overlooked buy those who register for VAT to claim back the VAT on capital expenditure items and then deregister from VAT.

VAT Deregistration: Perception

More often than not businesses that are VAT registered can have the appearance of being larger than they actually are.  With the VAT registration threshold currently at £79,000 (1st April 2013) if you are VAT registered then it can appear to the outside world that sales are much higher than in reality.

We have had businesses in the past that have lost out on potential work because they were not registered for VAT.  Like being a Limited company some businesses have strict criteria around who they will do business with and sometimes being VAT registered is one of them.

If you are dealing with business that know you are VAT registered then deregistering from VAT can have a negative impact.  As with the point above about appearing larger than you are, deregistering from VAT can have the opposite affect in that it could look as though the business is struggling and sales have dropped.

VAT Deregistration: Cashflow

Whilst cashflow should not be one of the major factors in your process of deciding whether to deregister from VAT you do need to take it into consideration.  If you business sells and buys goods that are standard rated and you are making a profit you would expect in most instances to have a positive cashfow from being VAT registered.  This is because you will be collecting VAT on sales and then paying it over on a quarterly basis.  This will not be relevant in every case so please bear in mind your debtor days when taking this into consideration of deregistering from VAT.

VAT Deregistration: Pricing/Margins

Deregistering from VAT can have a negative impact on your pricing or margins or in some instances both.  Work through the following examples to see how this could affect your decision about deregistering from VAT from the customers point of view.

You sell widgets that retail at £135+VAT including a 35% mark up and you are VAT registered.

Example A VAT Registered

You buy the widgets at £100+VAT and sell at £135+VAT to a customer who is VAT registered.  So the cost to the customer is £135 as they can reclaim the VAT.

Example B VAT Deregistered

You cannot reclaim the VAT so the cost of the widget to your business is now £120.  To maintain your 35% mark up you will now need to charge the customer £162.  The customer cannot reclaim any VAT as you are no longer VAT registered so the cost of the widget to your customer is now £162 instead of £135 costing him an extra £27 per widget.

VAT deregistration in this instance would mean you either need to reduce your mark up so the impact on your customers is less or accept the fact that you will no longer be as competitive.  As you will no longer being reclaiming VAT on overhead costs you may also feel the need to increase your mark up a but to cover this and this would make you even less competitive.

VAT Deregistration: Administration

VAT deregistration should mean the amount of administration you have to complete for your business is reduced.  This could end up being a false economy as many businesses only keep on top of their business records because they have VAT returns to file.  If there is no VAT return to file you could very quickly find yourself in a position of not knowing where you are.  Think about it.

You will still also need to maintain decent records to ensure you do not go over the compulsory VAT registration threshold or you are liable for any VAT on the sales in excess of the threshold (£79,000 1st April 2013).

VAT is another thing that you could get wrong so avoiding it could be a good thing for many particularly if you are not so hot on record keeping.

The timing of when you deregister from VAT is crucial as doing it at the end of a quarter will make your life easier.  You also need to give yourself time to work out what changes you may need to make to invoicing and ordering systems and changing your internal procedures.

VAT Deregistration: Validity

Are you eligible for VAT deregistration?  This is vitally important as there is no point thinking about the stuff above if you are not actually able to apply for VAT deregistration.  The forms and guidance you will need will depend on your reasons for VAT deregistration and why you registered for VAT in the first place.  The current VAT deregistration threshold for VAT is £77,000 from 1st April 2013.

There are many reasons why VAT deregistration may be compulsory:

If you are registered because you make taxable supplies in the UK, you must cancel your registration if any of the following occur:

  • you stop making taxable supplies
  • you sell your business
  • your legal status changes,
  • you disband your VAT group
  • you join a VAT group , or
  • you join the agricultural flat rate scheme

You must also cancel your registration where you registered because:

  • you intended to make taxable supplies but you no longer intend to do so, or
  • you made, or intended to make supplies outside the UK which would have been taxable if made in the UK, or are specified supplies, and you have stopped making or intending to make these supplies, or
  • you made, or intended to make supplies of warehoused goods which were permitted to be disregarded for VAT and you have stopped making or intending to make these supplies.

For full details on VAT deregsitration please see the HMRC website.

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