How to Deregister for VAT in the UK | Avoid Mistakes & Penalties

To deregister for VAT means that you stop charging VAT on sales and no longer need to submit VAT returns from the effective deregistration date. Businesses usually deregister when they stop trading, when their taxable turnover drops below the VAT deregistration threshold, or when they cease making taxable supplies. Some businesses choose to deregister voluntarily to streamline their accounting, enhance cash flow, or reduce administrative burdens.

This guide explains VAT deregistration, the reasons why businesses need to deregister, and the steps to cancel your VAT registration with HMRC.

What Does It Mean by Deregister for VAT?

If their taxable turnover is more than £90,000 in a rolling 12-month period, or expect to exceed the threshold in the next 30 days, businesses must register for VAT. Limited companies, general partnerships, limited liability partnerships (LLPs), and sole traders are all subject to these rules.

Deregistering for VAT is a term frequently used to describe the process of cancelling VAT registration. It is mandatory to submit an application to HMRC, whether online or by post, if you require or wish to deregister for VAT for any reason.

Why Deregister for VAT in the UK?

Most people wonder what are the reasons for deregistering for VAT? It is an excellent question! There are two main things:

Compulsory VAT Deregistration

HMRC may require you to deregister if:

• No Longer Offer VAT Taxable Goods or Services:

You can charge VAT only if your business trades or makes taxable supplies, which means you offer goods or services to customers that are subject to VAT. If you cease selling supplies liable for VAT and have no intention of doing so in the future, you are no longer eligible for VAT registration and are unable to charge your customers VAT.

It is also possible that you registered for VAT with the intention of selling taxable products, but the plan was never implemented. This happens a lot with startup businesses.

• Your Business Stops Trading

You must tell HMRC and terminate your VAT registration if you stop trading through your business. This could happen if you permanently close your business or make your company dormant and do not plan to trade again.

• You Sold Your Business

It may be necessary to terminate your VAT registration in the event that you decide to sell your business. Furthermore, you can also transfer your VAT registration if the new owner wants to maintain the same VAT number.

• Modification of the Legal Structure

Some established businesses change their legal structure. For instance, switching from a sole trader to a limited company or vice versa. In this case, you need to cancel the VAT registration for the original business structure in order to obtain a new VAT number for your new structure. In some cases, you may transfer your VAT number to the new business structure instead of cancelling it entirely. This allows you to keep your existing VAT number.

Voluntary VAT Deregistration

If your VAT-taxable turnover falls below £88,000 and you expect it to remain below this threshold for the next 12 months, you can apply to HMRC to deregister for VAT and cancel your registration.

Unless:

• You are supplying products or services to the UK or expect to do so within the next 30 days.

The most common reason for a business to terminate its VAT registration is that its taxable turnover has fallen below the threshold. This could be the outcome of:

• Reducing business hours
• Losing a major client
• Lowering your prices
• Expiry of valuable contracts
• Stopping production of a specific product.

Before deciding to deregister for VAT, it is important to thoroughly evaluate the disadvantages. This will lead to the loss of the ability to reclaim VAT on business purchases.

What are the Advantages and Disadvantages of Deregistering for VAT?

Advantages

Depending on your situation, deregistering for VAT could have a number of benefits:

• You may reduce your prices to gain a competitive advantage.
• Attract more non-VAT registered clients.
• You will no longer need to keep VAT records for VAT return purposes, although normal accounting records must still be maintained.
• Streamlined accounting and record-keeping requirements
• HMRC requires that the majority of VAT-registered businesses prepare and submit VAT returns quarterly. Additionally, VAT-registered businesses are required to comply with the Making Tax Digital (MTD) regulations, which mean the use of MTD-compatible software to submit VAT returns and maintain digital records. So, if you deregister, you will not have to comply with these requirements.

Disadvantages

There are a few problems that come with deregistering for VAT:

• You will be unable to reclaim the VAT you pay on any products or services you purchase for the business.
• Certain companies exclusively collaborate with other VAT-registered businesses.
• Deregistering could make it harder for you to find clients and suppliers that are willing to engage with you.
• Existing clients may interpret deregistration as an indication that your business is in trouble or not performing well.
• If your business isn’t VAT-registered, it may make your firm appear less credible to potential customers.
• You will need to closely monitor your turnover to avoid exceeding the VAT registration threshold again.
• This may restrict your business’s expansion.

Think carefully about these things before you make a decision, especially if you still have significant business expenses.

How to Cancel Your VAT Registration?

There are two methods by which you can apply to HMRC if your business meets the criteria for VAT deregistration:

• Through your VAT online account
• By completing form VAT7 and submitting it by post

Deregister for VAT online

To deregister for VAT online, you will need your Government Gateway user ID and password. After logging in, select “deregister for VAT” and follow the steps. During the procedure, you’ll be requested to provide the following information:

• VAT registration number
• The complete, formal name of the business (i.e., trading name)
• Principal place of business (i.e., your company’s main trading address)
• Contact phone number
• Additional information may be required based on the reasons for deregistration.
• The date you stopped trading,  ceased making taxable supplies, or wish the deregistration to take effect.

How Long Does HMRC Take to Deregister for VAT?

Within three weeks of submitting an application to deregister for VAT, you should receive a response from HMRC. However, it may take longer at times, particularly during busy periods or when HMRC requests further information.

You must continue charging VAT until HMRC confirms your deregistration date. If you don’t hear back from HMRC within 40 days of filing your application, you should contact them. If your application is approved by HMRC, you will receive a formal notice in your VAT online account that will confirm the official date of your VAT deregistration.

Deregister By Post

To deregister for VAT by post, you must complete form VAT7. You will be required to complete this form online, print it, and send it to HMRC at the address indicated at the conclusion of the form. A formal confirmation notice will be sent to you via mail if HMRC authorises your application.

What Happens After VAT Deregistration?

Even after you have deregistered for VAT, there are still a few items to keep track of. However, do not worry; it is easily manageable. The steps are as follows:

1. Final VAT returns: You must submit a final VAT return for the period up to the deregistration date. This will include both the VAT you owe and the VAT you are entitled to reclaim.
2. Pay VAT on Remaining Stock: You may need to account for VAT on stock and assets valued at more than £1,000 (excluding VAT) if you previously reclaimed input VAT on them. This could also apply to assets such as machinery or equipment. This is considered a “deemed supply,” which means you are treated as if you had sold the items, and VAT is due on the market value at the time of deregistration.
3. Maintain Records: You will be required to maintain your VAT records for a minimum of 6 years after deregistration. It is generally beneficial to maintain clarity, as HMRC might want to review them.

Deregistering can simplify things, but it is critical to remain on top of your responsibilities. If you are unsure about any of the steps, it is advisable to seek help from an expert to ensure everything is handled correctly.

Is It Important for a Limited Company to Deregister?

Not always. Being VAT-registered can still be advantageous if:

• Clients are VAT-registered enterprises and reclaim VAT.
• The company has significant VAT recoverable expenses.

Limited companies should evaluate their long-term tax strategy and short-term savings when deciding to deregister for VAT with HMRC.

Thinking About Deregistering for VAT? Let Our Limited Company Accountants Help You

Deregistering for VAT should help with your company’s financial plan, not just reduce paperwork. Our expert limited company accountants understand HMRC rules and can determine whether deregistering is the best option for your business. We can help you with:

• Provide tailored advice for your company structure
• Avoid costly VAT problems during deregistration
• Complete your HMRC file accurately and on time

Speak to our experienced accountants immediately and get expert advice to help you make confident VAT decisions.

The Bottom Line

Deregistering for VAT may streamline administration and reduce compliance obligations when business circumstances change. However, careful planning is necessary to ensure compliance with HMRC regulations and prevent unexpected VAT liabilities. Before submitting your deregistration request, it is important to review your financial situation, understand the consequences, and seek professional advice. An organised approach makes sure that your limited company runs as smoothly as possible while remaining compliant.

Disclaimer: All the information provided in this article is general in nature; it does not intend to disregard any of the professional advice.