VAT deregistration: Definition, Threshold, Advantage, Disadvantage & Workflow

Alongside advance VAT returns and VAT declarations, a company’s VAT deregistration is one of the lesser-known topics in the field of taxation. Nevertheless, it is of enormous importance for many companies to know when a deregistration comes into question, how to carry it out and what advantages and disadvantages it entails.

What is meant by VAT deregistration?

Above a certain turnover per year, a company is obliged to pay VAT. In the UK, this threshold is 85,000 GBP. If a company exceeds this threshold, it is obliged to register with the UK tax office and pay VAT. 

However, there are also cases where a company decides to deregister with the tax office and thus no longer bear VAT liability. Of course, this is only allowed in certain cases and is subject to strict regulation.

VAT registration threshold: When is it allowed to deregister from VAT?

Probably the most common case in which a VAT deregistration comes into question is falling below the annual turnover threshold specified by the state. If a company generates less than 85.000,- GBP turnover per year and thus falls below the threshold determined by the law, a deregistration can be applied for. Companies that are already registered with the tax office must fall below this threshold by at least GBP 2,000 in order to do so. This is to avoid that a company registers and deregisters again and again.

The company must remain below the turnover threshold for at least twelve months after deregistration, otherwise a new registration with HMRC (HM Revenues & Customs), i.e. the English tax office, is required. Failure to do so may result in charges of tax fraud.

Cessation of trading activity

If a company ceases trading, a deregistration must be made with HMRC before it closes permanently. Once this has been done, the company may no longer officially make taxable sales. In the event of a partial closure, sale or demerger of the company that causes turnover to fall below £83,000.00 in the following 12 months, a VAT deregistration is also advisable.

Other cases where a VAT deregistration is eligible:

• Company joins a VAT company
• Dissolution of own VAT company
• Sole proprietorship is transformed into a joint stock company
• Legal entity of the company is changed
• Joining the English agricultural flat-rate scheme on the part of an agricultural enterprise

Advantages and disadvantages of VAT deregistration

Companies that fall under the VAT registration threshold are free to decide whether they want to deregister with HMRC or still remain liable for VAT. In doing so, each company must weigh up the advantages and disadvantages and ultimately decide for itself which path is best for it. 

Advantages of a VAT deregistration

Companies that do not have to pay VAT can adjust the prices of their products or services downwards and thus operate more competitively on the market. By keeping prices low, the company can attract new customers or add the VAT to its own profit margin. 

Since a VAT return or advance VAT return no longer has to be made after a VAT deregistration, a lot of work is eliminated, especially for small and young businesses. Companies that are in financial difficulties can invest the costs of preparing the VAT return elsewhere. The obligation to bring one’s own accounts up to scratch on a quarterly basis is also eliminated by the VAT deregistration.

Disadvantages of VAT deregistration

However, deregistration of VAT also brings some disadvantages. After this, it is no longer possible for a company to deduct company expenses from VAT.

Often, disorder spreads on the company accounts after the VAT return, since one is no longer obliged to continuously check them and bring them up to the correct status. Not only does the entrepreneur lose track of his finances in the long run, but he also has to invest a lot of work as soon as the accounts have to be brought back into shape. 

The company’s good reputation can also suffer from a VAT deregistration. Large business partners as well as potential major customers may turn away from VAT-exempt companies because they consider them too small or unserious. The VAT deregistration can therefore also have hidden, economic consequences for the company.

How does the HMRC VAT deregistration work exactly? Can it be done online?

The VAT deregistration must be requested by the company from HMRC. The deregistration form can be submitted online or by mail. After processing the application, which takes about three weeks, you will receive the definitive cancellation date from which the company will lose its VAT liability. In the application you can optionally specify a preferred date for the cancellation date. 

Cancellation can be made up to six months after application if required. From the cancellation date, the registration forms, as well as all other tax-relevant documents, must still be kept for at least six years. Prior to deregistration, the company must submit a final VAT return for the outstanding period to the English tax authorities.

How can hellotax help you with the VAT deregistration?

Keeping track of accounts at all times is important for businesses liable to VAT, as well as for companies that are not registered with HMRC. Especially for companies whose annual turnover is close to the £85,000 threshold, it is essential to have their sales proceeds on screen at all times.

With hellotax you always keep the overview. As a user, you receive all important information about your company with just one click. In addition to optimizing your taxes, we provide you with a constant, precise overview of your finances, showing you your income and expenses as well as your annual turnover.

Our AI (Artificial Intelligence) software adapts perfectly to your needs and reminds you of important events and deadlines. hellotax immediately alerts you as soon as you fall below the sales tax threshold and thus a sales tax filing for your company comes into question. 

If you are a VAT-exempt company and you exceed the turnover limit set by the government, we will help you with the registration and support you with the VAT return as well as with the advance VAT returns and the communication with the English tax office. Problems that cannot be solved by our software will be solved by our tax experts, who are always ready to help and advise you.

Summary

If your business falls below the annual turnover threshold, you can deregister for VAT with the UK tax authorities. However, this decision should not be taken lightly, as it brings with it various advantages and disadvantages. Seek expert advice to find the best solution for your business.

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