The pitfalls of cancelling your VAT registration
An accountant recently asked me to help with a problem that one of his clients was facing.
The client was a company which owned a property. When it bought the property it had to pay VAT. To be able to recover this VAT the company opted to tax the property, i.e. it opted to charge VAT on any supply it made of the property. Without opting to tax the property the rental income would have been exempt from VAT and the VAT on the purchase price would have been irrecoverable.
Up to a couple of years ago the property company had received regular payments of rent and accounted for VAT. It then stopped receiving payments and put in nil VAT returns. This eventually attracted the attention of HMRC which wrote to the company asking it to give good reason to remain VAT registered, or its VAT registration would be cancelled. The letter from HMRC also invited the company to apply for its registration to be cancelled and gave instructions on how to find out how to do this.
The company after seeking advice decided to apply for its registration to be cancelled. Unfortunately it had overlooked the impact of doing this which would mean that because it had a property on which it had recovered VAT when it bought it, it would have to account for VAT on it. At the very least this would be the VAT it recovered when it bought the property, but based on the rules for determining the value of assets on hand at the time a registration is cancelled this would probably mean taking a current market value which would be substantially higher than the price paid. The result being that the VAT that would have to be paid to HMRC would be rather more than the company could reasonably expect to find with ease.
The accountant who was aware of the potential problems for his client returned from holiday to find that his client’s VAT registration was being cancelled with the potential for a large VAT bill for the current value of the property.
HMRC have been made aware of the position and the company has decided to start collecting rent again. This means that the company will again be making taxable supplies and should be able to keep its VAT registration number. The response from HMRC is awaited.
Now this is a more complicated case than one might expect to find in the average case where a business cancels its VAT registration. It serves, however, to highlight the need to make sure that nothing is ignored when making the decision to apply for cancellation of a VAT registration.
What do you need to consider?
The legal bits
Have you ceased to trade? If so you should tell HMRC within 30 days.
If your turnover has fallen below the relevant limit – see the registration limits page for details – you may apply to cancel your registration.
The consequences
If you cancel your registration, you will have to pay HMRC VAT on the goods you have on hand on the last day the business’s VAT registration where the VAT on those goods would be more than £1,000. This means that the value of goods on hand would have to be more than £5,715 where the rate of VAT is 17.5% or £5,000 where the rate of VAT is 20%.
Some items are excluded from the charge to VAT. These are mostly items on which no VAT has been recovered.
How do you work out the value of the goods
The value is the amount you would have to pay to purchase identical or similar goods, including taking into account age and condition, on the date the registration is cancelled.
How do you account for this VAT?
You put the VAT that is due on the Final VAT Return that you receive from HMRC.
If you are considering cancelling your VAT registration, or have been told by HMRC that they will compulsorily cancel it, you should seek help from a VAT specialist.
If you have any questions on this issue, please leave a comment and I’ll reply as soon as I can.
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