Contractors’ Questions: When do I need to deregister for VAT?

Contractor's Question:  When do I need to de-register for VAT? If my income drops below the current threshold do I have to de-register? Also what happens if I break from trading for a short while? Can you tell me what the process is for de-registering is please?

Expert's Answer: Cancelling a VAT registration is a relatively simple process. You will find an application form online at www.hmrc.gov.uk and you should complete a form VAT7 and return it to the VAT Registration Service.

You will either cancel your registration on a compulsory or voluntary basis.  The main reasons for cancelling on a compulsory basis would be when you stop making taxable supplies; you sell your business; or your legal status changes (for example from sole proprietor to partnership or Ltd Co, although you can in this case apply to retain your existing VAT number).

If you chose to voluntarily deregister it would likely be because you expect your turnover to drop. In this case you must satisfy HMRC that your taxable turnover in the next 12 months will not exceed the deregistration limit (currently £71 000). You should write to HMRC explaining why your turnover is expected to drop (common examples are lost contracts; reduction in time available to spend on the business) beneath the limit.

When you deregister voluntarily the date your VAT Registration ends will either be the date HMRC receives your application or a later, agreed date. Please note this date cannot be agreed retrospectively.  You should continue to charge and account for VAT until you receive confirmation that your application has been accepted. You should receive confirmation of the decision within 3 weeks, if you don’t please contact HMRC to follow up on your application.

However, as is often the case I would suggest you contact your accountant or similar to discuss your decision. Many contractors use the Flat Rate Vat Scheme and if you deregister from FRVS you must wait a full 12 months before re-applying, so please consider your decision and your future trading patterns before making your decision.

The expert was Alasdair McGill, managing director of Freelance World, a tax and accountancy specialist.