On the Increase VAT Registration and Deregistration Thresholds

On the Increase: VAT Registration and Deregistration Thresholds

In the Chancellor’s recent budget, he announced an increase in the VAT registration threshold on 1 April 2024 from £85,000 per annum to £90,000 per annum. The deregistration threshold has also increased from £83,000 per annum to £88,000 per annum. These thresholds have remained frozen since 1 April 2017 and are among the highest worldwide with an average of £44,000 in the EU, therefore keeping many small businesses out of the ‘VAT club’.

With this increase in the threshold, some businesses will now to able to deregister from VAT; but is this necessarily a good idea, and can there be some circumstances when registering for VAT voluntarily might be a good idea?

 

Why Register Early?

If the sales of a business are below the limit, or if the business has not yet made any sales, it can apply to register voluntarily, thus enabling it to reclaim any input tax incurred.

A business would want to register for VAT if it makes sales to other registered businesses, which are fully taxable. They can recover the VAT charged to them. aThe costs of the business are reduced by the input tax, which it can recover.

Voluntary registration is not intended to allow a business to recover input tax without ever making any taxable supplies. A business is entitled to registration at the start of a project, even if it may be several years before it produces taxable outputs, provided it can show that it has genuinely started a business.

 

Things to Take into Account When Considering Deregistration

A business has to account for VAT on assets held at the date of deregistration if the tax exceeds £1,000. The assets in question include:

  • stock;
  • plant and machinery, office equipment and furniture;
  • commercial vehicles – and on any car on which the business recovered VAT because, for example, it was being used as a taxi; and
  • land and property if the business recovered VAT on it when it was acquired, and the commercial property is either less than three years old or they have opted to tax it.

A business does not have to account for VAT on services, so if it has had a property refurbished, the building work counts as a service, and it does not have to account for any VAT on the value of the building work when it deregisters from VAT.

Although no output tax is due at deregistration where there is land and property on hand on which no input tax was recovered, but the option to tax has subsequently been made, any future sale of the property in the 20 years following the date the option to tax was made will be standard-rated and constitute turnover for VAT registration purposes, causing the business to have to re-register for VAT and account for VAT on the sale.

There is also a problem with VAT on deregistration for partly exempt businesses. If they have had partial recovery of VAT on any asset, they will have to account for output tax on the full value of the asset at the time of deregistration, even though they did not initially recover all the VAT.

These factors need to be taken into account when considering deregistration, but if a business is selling to the public and does not incur significant VAT on its costs (e.g., a shop in the catering industry will have mainly zero-rated inputs but standard-rated outputs), deregistration would be appropriate in such circumstances.

 

Practical Tip

It is important to work out any potential costs and potential savings before deciding to deregister for VAT following the increase in the deregistration threshold.

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