Guide to VAT deregistration: How to cancel your VAT registration

Businesses evolve and change over time, with knock-on effects on the way they operate.

And the number of businesses registering for VAT and PAYE has reportedly fallen by a hefty 40,000, with small companies and sole traders deregistering at the highest rate in a decade.

VAT deregistration for contractors: intro

The cost-of-living crisis mixed in with rising utility bills, disruption to supply chains and a seemingly endless list of commercial challenges, have seen many businesses close their doors or scale back operations.

For contractors who no longer deal with Value Added Tax-applicable items, or who cease trading, cancelling VAT registration is a requirement -- and timing is crucial.

But almost regardless of when you do it, deregistering from VAT is a pivotal decision, typically hinging on factors such as sales/turnover and changes in commercial activities. So, asks Chris Bradley at The Accountancy Partnership, how do you cancel your VAT registration?

What is VAT taxable turnover?

VAT taxable turnover is the total amount of sales made in the last 12 months which would have been subject to VAT.

The ‘last 12 months’ doesn’t mean a fixed calendar year or tax year; it’s a rolling 12-month period.

How do I check my VAT taxable turnover?

The amount of VAT taxable turnover your company has is one of the reasons why accurate financial records are essential for a business. Indeed, it’s here that you’ll be able to monitor the sales/turnover which your business makes.

The best bookkeeping – and that’s detailed bookkeeping -- will help you understand which of your sales are VAT-applicable, so you can work out your turnover for VAT purposes.

Do I need to cancel my VAT registration?

If your taxable turnover falls below £85,000, you can ask HMRC to cancel your VAT registration.

Be aware though, some businesses prefer to keep their registration because it helps them to be more tax-efficient. This is because VAT is charged by VAT-registered sellers, and VAT is paid by the customer regardless of whether they are also registered themselves.

One of the benefits of being VAT-registered is that it means, as a business, you could claim back the VAT you pay on purchases, if the amount paid out is higher than the amount collected on sales during the same period.

If your business tends to make sales which are not VAT-applicable, but regularly makes purchases which are, then you will normally be able to claim back VAT. Staying registered can therefore be quite useful!

Busting a VAT myth…

One of the myths that impede everyone from understanding Value Added Tax is that only limited companies can register. But this is not true.

Sole Traders, partnerships, limited liability partnerships (LLP), clubs, associations and limited companies are all eligible for VAT registration.

So the structure of business which you are won’t necessarily impact your registration status -- if it changes, although you will need to report such changes.

How do I deregister for VAT with HMRC?

Businesses are encouraged to register for VAT online using their own ‘VAT online account.’

HMRC must be notified about de-registering for VAT within 30 days and it rigorously enforces this policy. Failure to notify within the deadline may result in a penalty. HMRC will also automatically re-register businesses if a cancellation was made but was unnecessary.

It usually takes three weeks for HMRC to confirm cancellation and provide an official VAT ‘cancellation date.’

You must stop charging VAT from the cancellation date, although you may be able to claim back VAT that you incurred while registered even after the cancellation date. There are, of course, deadlines for doing so which you’ll need to meet.

After VAT-deregistration…

After deregistration for VAT, you’re required to submit a final tax return for the period up to and including the cancellation date. You’ll also need to keep your VAT records for a minimum of six years.

If your venture is going to continue trading, then it’s crucial you continue to monitor your VAT-applicable sales, and then re-register the business for VAT in the event your taxable turnover approaches the £85k registration threshold.

Can I transfer VAT registration rather than cancelling it?

VAT-registration can be transferred if a business comes under new ownership or changes from a partnership to a sole trader.

Records must be passed to the buyer if a VAT number is being passed on and HMRC contacted within 21 days of the transfer application if the seller’s accountant is being retained; new self-billing arrangements are made, and new Direct Debit accounts set up for a VAT online account.

VAT deregistering as a company, an outro

When it comes to VAT registration and deregistration, a well-informed and strategic approach can contribute to financial stability and success.

Having a comprehensive perspective on VAT management can empower businesses -- including contractor limited company owners -- to make decisions that align with their evolving needs and aspirations. To sense-check those decisions, always take professional advice.