Avoiding mistakes and costs when deregistering from VAT

Do businesses deregister for UK VAT?

In 2024 the UK had just under 2.2 million VAT registered businesses. It gained 238,176 businesses during the year, which goes some way to explaining why there are lots of publicly available resources, including guidance from HMRC and professional advisers, about the new burdens that come with registration.

However, more businesses (273,768) left the regime during the same period. While this will lead to reduced administration for those involved going forward, the moment of deregistration can create unexpected costs if not managed properly, and it should be managed with as much care as that given to an initial registration.

Types of deregistration

A business will leave the VAT regime on either a compulsory or voluntary basis. The implications of either are the same but before considering those it’s necessary to be sure that deregistration is the correct step to take.

This occurs when a business is no longer liable to be VAT registered in the UK. This will only occur if it ceases to make taxable supplies, which for VAT purposes means it no longer makes sales on which it should account for VAT, receives supplies subject to the reverse charge or for businesses in Northern Ireland (NI), makes acquisitions.

You also will need to cancel the VAT registration if the business joins or disbands a VAT group. In the former situation, the VAT group number will apply going forward.

If the trade and assets of the business are sold to a new owner, they often will not want to take on your VAT number, and hence it will also be necessary to deregister.

Voluntary deregistration

Sometimes deregistration isn’t necessary, but circumstances can lead to it being a possibility. The most common cause of this is a business making taxable supplies under the deregistration threshold (which increased to £88,000 on 1 April 2025). If you can demonstrate to HMRC that the business’s future supplies subject to VAT will be under this amount, a deregistration will be allowed. Of course, if the business goes back above the registration threshold (currently £90,000), then re-registration may be necessary.

In addition to the above reason, businesses can also deregister if they can demonstrate to HMRC that they will only be making zero-rated supplies going forward. This is allowed by HMRC because they will not be losing out on VAT revenue and the business will no longer be recovering VAT on costs, so it results in a net gain for HMRC. The business should consider whether the reduced administration outweighs the lost VAT repayments, along with ongoing monitoring to check no supplies subject to a positive rate of VAT are made, or, if they are, that they are minimal compared to zero rated supplies also made and the business is still in a repayment position, as that would generally trigger a need to re-register.

Notifying HMRC

When liability to be registered ceases or the business is eligible to deregister voluntarily, HMRC need to be notified within 30 days of that event. This can normally be achieved via an online application, but paper options are available as required. HMRC currently suggest it will take up to three weeks to receive a reply. If a business ceases to trade, the day that happens will be the effective date of the deregistration. If you voluntarily deregister, then the date will be from when you request that, and once that is confirmed, the final step will normally be to submit a final VAT return.

Managing the potential VAT traps

Before HMRC is notified of a deregistration, it is good practice to take stock of the business’s current position and review the implications of deregistration. These will vary depending on the facts to hand, but it is prudent to consider these as soon as possible to allow sufficient time to correctly and efficiently manage all the obligations that might be created. Key issues to consider on deregistration are as follows:

Assets and stock at hand

Before deregistration, it usual to assume that a business will have been recovering VAT incurred on its costs (subject to the normal rules). However, if at the time of deregistration, it has items to hand on which VAT costs were recovered, HMRC will expect the business to make a ‘deemed’ supply of them and account for VAT on the imagined proceeds.

For example, if a retailer had been stockpiling goods that it intended to sell and had recovered VAT on costs associated with their purchase but then ceases to trade with some of that stock remaining, VAT will be due on that. The rationale for this is that VAT is only recoverable on costs that are attributable to the actual making of taxable sales.

The amount of VAT due will be calculated by reference to the market value of those goods. This means that it could be more or less than the price at that which was paid for them, and this could have a significant bearing on the amount of VAT to pay. The value is a subjective matter, and businesses are recommended to keep a record of the method used to reach any values which includes supporting evidence for that position.

As a rough guide, items that can fall within this provision include plant, furniture, commercial vehicles and computers.

Intangible assets, which could include patents and copyright, are not subject to these rules. It should go without saying but if VAT was not incurred or recovered on a purchase, VAT does not need to be accounted for on it at deregistration.

The final point to note on this is that there is a de minimis level to consider. If the total VAT due on the assets held is less than £1,000, the VAT charge can be ignored. In practice, this means that the combined value of all assets left on hand at the time of deregistration must be less than £6,000, a threshold which is quite hard to benefit from for all but the smallest businesses.

Capital Goods Scheme (CGS)

The CGS is a methodology that exists to make businesses assess the amount of VAT they can recover on high value assets over a five or ten year period. The purpose here is to stop large amounts of VAT recovery occurring at the outset, on the basis that the cost is for a taxable use, but then later having the VAT become attributable to an exempt supply where a restriction should have been in place.

The current thresholds for items to be included within the CGS are £50,000 plus VAT for computers, aircraft and ships which have the  five year period whilst its £250,000 plus VAT for property expenditure and ten-years. This encompasses purchases, construction and refurbishment.

If not managed correctly, deregistration can spring some nasty surprises that can create their own administrative issues and unexpected costs.

HMRC have recently proposed that the threshold should be extended to £600,000 for property and to take computers out of scope. There has been no mention of the other items, and relevant legislation for these changes is pending for confirmation on the matter.

The CGS can cause issues when a business deregisters in the middle of a CGS period. For example, a business may have refurbished its headquarters and incurred £1 million of VAT while doing that. As a fully taxable business at the time, it recovered all that VAT. It then ceases to trade seven years later and is no longer liable to be registered. At this stage there are still three years of the CGS period left, but as the business is deregistering, it will not be making any taxable supplies in that time. Therefore, the last three years of the CGS calculations must be made in one go and on the basis that there is no use which gives the right to VAT recovery. The outcome would be that £300,000 of VAT must be repaid to HMRC.

Property

In addition to possibly falling within the CGS, the deemed supply rules as described above can also apply to owned properties where VAT was incurred on the purchase. A VAT charge can also occur even if no VAT was incurred at purchased where an Option to Tax (OTT) has been made on it by the deregistering business.

An OTT means that nearly all supplies of a property become subject to VAT instead of being exempt. It has effect for a minimum of 20 years from the date of election. When the business decides to keep such a property at deregistration then if it makes a sale of it within the OTT lifespan then VAT will still be due despite it being deregistered. It is important therefore to monitor this to ensure that VAT is accounted for and declared correctly to HMRC, which will be via different methods given there will no longer be a VAT number to hand If not managed correctly, deregistration can spring some nasty surprises that can create their own administrative issues and unexpected costs.

Administrative points to consider including input tax claims and returns

Once a business is deregistered, it can no longer issue VAT invoices. Therefore, if the business continues to trade but has deregistered because it’s below the threshold, it must amend its invoicing systems to reflect the lack of VAT becoming due.

The opportunity to make Bad Debt Relief (BDR) claims will need to be reviewed. These allow for output tax to be reclaimed on the VAT return if it has been declared and paid to HMRC, but the customer not paid the supplier within six months. It is particularly important to do this when deregistering, as making further claims will be possible but far more difficult than when compared to being registered.

With respect to returns, a business should submit a final return to its effective date of deregistration within a month of that date, with the normal seven-day extension added for online submissions. In practice, it is often the case that this deadline has expired by the time that HMRC has processed the deregistration and set up the final return, which can lead to penalties for late payment and a need for protracted discussion around trying to mitigate those.

Helpfully, from 14 June 2025, HMRC’s informal practice of extending the deadlines via an administrative concession has been legislated for (SI 2025/578). This is good news as HMRC now have a legal basis to support their action, which provides certainty for all parties.

Finally, in that last return, a business should consider including any remaining VAT due on both the sale and purchase side. In practice though, it is often the case that purchase invoices which carry recoverable VAT will be received after the final VAT return is submitted. If this happens, the business is allowed to make a claim for it, but a separate form must be submitted to HMRC. Wherever possible, it is recommended that businesses liaise with suppliers to get all invoices in as soon as possible because, although this method allows for recovery, it does create negative cashflow positions.

Key takeaways

Deregistration from VAT can bring relief from the ongoing compliance burdens that are imposed. However, if not managed correctly, it can also spring some nasty surprises that can create their own administrative issues and unexpected costs.

If the business needs to be deregistered, consider the following steps at least before starting the process:

• review the BDR positions and make any possible claims promptly.
• discuss the issue of any final invoices with suppliers, to ensure that as far as possible they are received in time for the final return. If they are not, do not forget any making further claims.
• check inventory and items that might be on hand at deregistration, and consider selling them before you stop trading or need to notify HMRC.
• review CGS and OTT records to confirm if any potential costs might be due upon deregistration. If that is a possibility, then consider selling before deregistration.
• confirm and recheck the business’s future business: consider whether there are any substantive reasons to support remaining VAT registered, rather than having to deregister and then re-register in the near future.

If care is taken to plan, then deregistering from VAT should be straightforward. Investing some time to prepare will nearly always result in minimising costs and administration and, if there is going to be VAT that must be paid, at least gives you time to make arrangements for managing that.

For further information on anything discusses in this article, please contact Rob Janering, or your usual Crowe contact.

This article was first published in Tax Journal on 2 July 2025.