Alastair Johnston, Head of Tax

In the current Covid-19 crisis, many businesses are suffering from a sharp fall in turnover or have had to close their doors for the duration.
For a business with turnover which was a little above the VAT registration threshold, this may mean a drop to less than the VAT de-registration threshold of £83,000 over a 12-month period.
As the lockdown continues in Scotland while being eased in England, the possibility of de-registering to save some money may look more and more attractive.  But there are pitfalls which may make it a bad idea, so you should take advice before doing so.

If your customers are VAT-registered and can recover the VAT which you charge them, there is no advantage to you in ceasing to be registered.  It won’t save your customers any money, but it will cost you because you won’t be able to recover the VAT on your own costs.

If some or all of your customers can’t recover VAT – if they aren’t in business, or their business is unable to recover all of its VAT – or if your sales don’t relate to their business – then on the face of things, VAT de-registration may look like a good idea.  You’d no longer have to pay 1/6 of your turnover to HMRC as VAT, so you would increase your profit once things start going back to normal.  Maybe you could drop your prices and gain a competitive advantage?  You would no longer be able to recover VAT on your costs, so your costs would go up, but overall you should benefit.

If you are in a business which incurs little input VAT, such as takeaway food or a service business, this might seem very attractive.  You need to polish up your crystal ball and do the arithmetic, but there are other things to consider as well.

If you are still able to trade but your turnover is down, so that you think that your turnover will fall below £83,000 over the next 12 months, then you are free to apply to de-register.  You have to persuade HMRC that your turnover will fall far enough, but at present many applications seem to be going through on the nod.

On the other hand, if you have temporarily stopped trading, you may not be entitled to de-register.  HMRC’s guidance looks like you may be OK.

“HMRC will not allow you to cancel your registration if the reduction in your turnover is the result of your intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.”

You haven’t stopped of your own volition; you’ve been made to stop – can you say that it was never your intention?  But HMRC are paraphrasing the law, and the law isn’t so helpful.  You cannot de-register if HMRC are satisfied that the reason for the fall in turnover is that you will suspend making supplies for 30 days or more.  Your intentions have nothing to do with it; the HMRC guidance wasn’t written with these unusual circumstances in mind.

De-registering can itself incur a cost.  If you have any goods on hand – stock, consumables or fixed assets – on which you have reclaimed input VAT, you have to pay output VAT on them to HMRC in your final VAT return, if it is over £1000.  This includes property if you’ve opted to tax it, and it has to be based on the current market value, so that could be expensive.

And when things go back to normal, what if there is pent-up demand from your customers, and your turnover bounces back so that over the 12 months you remain above the £83,000 threshold after all?  Will HMRC accept that you were within your rights to de-register?  You could end up having to pay interest and penalties on undeclared VAT.

As ever, VAT is a complex subject and you should tread carefully.  If you have any questions about the DRC or its effect on your business, please contact Alastair Johnston or your usual William Duncan contact.

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