If your business turnover is below £80,000 you can deregister for VAT, which may bring some advantages. However, there can also be costs. Here are some of the potential traps you need to be aware of…
For businesses that sell to the general public – or to other businesses that can’t reclaim VAT on purchases – it can be a competitive advantage to deregister for VAT. Without having to add VAT to your sale price you might be able to undercut your competitors, or keep your prices the same and thus make more profit.
If you do wish to deregister for VAT, either temporarily or permanently, your business turnover will need to be below the deregistration limit, currently £80,000 per annum. However, before you do so you should take professional advice, as there are some potential pitfalls.
Trap 1 – Beware losing input VAT
Don’t forget that once you deregister you will no longer be able to reclaim input VAT on purchases. However, this will likely only reduce your savings by a relatively small amount.
Trap 2 – Beware assets value if temporarily deregistering
If you are thinking of deregistering for a temporary period only, you need to be aware that if the VAT on the current value of your business’s assets (such as equipment or stock) is more than £1,000 at the time of deregistration, it has to be repaid to HMRC (if you could reclaim VAT when you bought them). This could effectively eliminate the savings you were intending to make. This point is less problematic if you are intending to deregister permanently, but it is important to be aware of it.
Trap 3 – Beware the capital goods scheme
Another factor to be aware of before deregistering is the capital goods scheme (CGS). The CGS applies to the purchase of land or buildings – and to the refurbishment or extension of existing buildings – where the cost is more than £250,000 and you have reclaimed VAT on it. For the ten years following the reclaiming of the VAT there is an ‘adjustment period’, during which you will have to repay some of the VAT you originally reclaimed if you decide to deregister for VAT.