Four Top Tips to Avoid VAT Deregistration Traps

You’re closing your business and moving on to a new venture. As a result you’re cancelling your VAT registration. HMRC has told you that you must pay VAT on the value of assets still owned by the business. Does this apply to all assets?

Cancelling your registration

There can be many reasons why you might want or be required to cancel your VAT registration. When you do the rules deem your business to have supplied (sold) all assets, e.g. stock, equipment and property, it owns on that date. It doesn’t matter if a business was run by a company, partnership or sole trader, the position is the same. The resulting VAT must be accounted for on a special final return.

Trap. Where you used VAT cash accounting, while the business was running you will only have accounted for VAT when you were paid by customers. However, on your final return when you deregister you must account for VAT on invoices you’ve issued even if you haven’t been paid.

How much VAT?

The amount of VAT you must account for depends on the value of the stock etc. The value of each item is the amount you could expect to get for it if you sold it in its current condition.

Tip 1. If the VAT payable on all the assets adds up to no more than £1,000, you don’t have to report or pay any VAT with your final return. But if it’s more than £1,000, all the VAT has to be paid, i.e. it’s not reduced by £1,000.

Tip 2. Remember to apply the correct rate of VAT. If an item is zero-rated, such as a book, the VAT is nil and won’t count towards the £1,000.

Land and buildings

If your business owns a property, the VAT bill on deregistration can be especially high if it’s less than three years old since the completion of construction or you have opted to tax it.

Tip. In the latter situation if the option has been in place for more than 20 years you can withdraw it before deregistering so that you don’t have to account for VAT on its value.

Another exception

Another situation where you aren’t required to account for VAT when registration is cancelled is where you didn’t reclaim any when you purchased an asset (because you weren’t entitled to). This is most likely to apply to:

  • cars used by you or your employees
  • assets which you bought under the general or one of the specific second-hand schemes
  • purchases from unregistered traders
  • assets directly linked to making exempt supplies
  • land and buildings which weren’t VATable.

Trap. The exceptions above might not apply if they were transferred to you as part of a business which was a going concern, and on which you weren’t charged VAT. In this situation HMRC looks through to the VAT position of the person who transferred the assets to you. If they recovered VAT on the purchase you must account for it when you deregister. In practice you’ll only need to worry about major assets such as land, buildings and heavy machinery.

Tip. When you buy a major asset keep a record of whether VAT was reclaimed with your accounting records so that in the event of deregistration you don’t account for VAT unnecessarily.

VAT must be accounted for on the value of assets owned by the business at the date registration is cancelled, but not necessarily on all of them. If you didn’t reclaim VAT on their purchase you won’t have to account for them. You also don’t have to pay any VAT if the total due on deregistration is up to £1,000.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

For any assistance contact Companies999, we will be happy to help you!

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