VAT deregistration: when and how to cancel your registration.

Two kinds of cancellation

HMRC talks about cancelling your registration. Most people call it deregistering. There are two routes into it, and they work differently.

• You must cancel. This applies when you are no longer eligible to be VAT registered. Common examples are stopping trading, stopping making taxable supplies, or joining a VAT group.
• You can choose to cancel. This applies when your taxable turnover falls below the cancellation limit, which is currently £88,000.

The deadlines and the risks are different for each, so it pays to be clear which one you are in.

When you must cancel

If you are no longer eligible to be registered, you must tell HMRC within 30 days of that happening. If you miss the 30 days, you may be charged a penalty. GOV.UK does not give a fixed amount for this penalty, so treat the 30 days as the deadline that matters.

Closing down is the most common reason. Selling the business is another. But a sale does not always mean cancelling. If the buyer is keeping your VAT number, or you are changing legal status and keeping the number, the registration is transferred rather than cancelled. That uses a different process.

When you can choose to cancel

You can ask HMRC to cancel your registration if your taxable turnover falls below £88,000. That is lower than the £90,000 registration threshold, so a business can sit between the two figures without having to do either.

The test looks forward, not back. You must be able to show that your taxable turnover in the next 12 months will be below the cancellation limit. A few points from HMRC's guidance (VAT Notice 700/11) catch people out:

• Turnover is worked out without VAT. HMRC may refuse if the figure goes over the limit once VAT is added to it.
• Closing down does not count. HMRC will not allow voluntary cancellation where the fall in turnover is because you plan to stop trading, or to suspend taxable supplies for 30 days or more in the next 12 months. In that case you are in the "must cancel" route instead, at the right time.
• You must stop charging VAT. You also need to show HMRC you will stop charging VAT or, if you are a retailer, that you will reduce your prices by the VAT element.

There is a separate option if most or all of your sales are zero-rated. You can apply for an exemption from registration, and this can be done through the same online service.

Is choosing to cancel a good idea?

Not always. Once you are deregistered, you stop charging VAT on your sales, but you also stop reclaiming VAT on your costs. A business that sells mostly to the public may gain, because its prices can stay the same while VAT no longer comes out of them. A business that sells mostly to VAT-registered customers may gain little, because those customers could reclaim the VAT anyway. A business with high VAT-bearing costs, or one that reclaims more than it pays, could be worse off. It is worth modelling a year of figures both ways before you apply.

Keep an eye on growth too. If turnover climbs back over £90,000 in a rolling 12 months, you have to register again. Our guide to daily vs monthly bookkeeping covers why current books make that threshold easier to watch.

How to apply

You can cancel online, through the VAT section of your HMRC business tax account. GOV.UK lists the online route for these cases:

• You have stopped trading and are not in a VAT group
• Your taxable turnover is below £88,000
• You have stopped making taxable supplies
• You are applying for an exemption because most or all of your sales are zero-rated

Some cases must use the paper form VAT7 instead. These are a change of legal status where you want a new VAT number, selling the business where the new owner is not keeping the number, a VAT group closing (which also needs form VAT50-51), and a business that has stopped trading after liquidation.

The cancellation date

You cannot cancel from a date in the past. The date will be either when the reason for cancelling took effect, or the date you asked for. For a voluntary cancellation, that is the date HMRC receives your application or a later date agreed with HMRC.

Keep charging VAT until HMRC confirms the cancellation. HMRC usually confirms within 40 working days, though it can take longer in busy periods. The confirmation arrives in your online VAT account, or by post if you applied on paper. From the cancellation date, you stop charging VAT.

If HMRC later realises you should not have cancelled, it will register you again automatically. Any VAT owed for the time in between will then need to be paid.

The final VAT return

Everyone who cancels must send a final VAT return. It covers the period up to and including the cancellation date. Your due date is sent to you by post, or you can check your VAT online account. You must file and pay by that date.

The final return is where tidy books matter most. It has to include every sale up to the cancellation date and every purchase you are reclaiming. If the books are behind, the final return becomes a catch-up job against a deadline. Our guide on how to file a VAT return walks through the return itself.

You do not have to wait for every supplier invoice before filing. HMRC's guidance says you can still claim VAT on supplies you received while registered, as long as you have not already claimed it and you hold proper evidence. You cannot claim input tax you were charged more than 4 years ago. For what counts as proper evidence, see reclaiming VAT.

Stock and assets you still hold

This is the part people miss. When you cancel, you may have to pay VAT on the stock and other business assets you still have on the cancellation date. It applies when both of these are true:

• You reclaimed VAT when you bought them, or could have done
• The total VAT due on them would be more than £1,000

If the total VAT would be £1,000 or less, there is nothing to pay. Above that, VAT is due on all of the goods, not just the part over £1,000. HMRC's guidance says to value them at the price you would expect to pay for them now, not what you paid at the time. If that cannot be worked out, use the cost of producing them.

A worked example

Selling or using up stock before the cancellation date changes the picture, as sales before that date go through the normal returns. Planning the date with your accountant can make a real difference.

Property with an option to tax

If you have opted to tax land or buildings, the option stays valid after your registration is cancelled. If you keep the property and claimed input tax on it, there can be VAT to account for on cancellation. Take advice before you apply in this case.

Records after you cancel

Deregistering does not end your record keeping. You must keep all VAT records for 6 years. HMRC's guidance also says to keep the cancellation notice and a list of the business assets you held at cancellation, with their values, for 6 years.

Your income tax or corporation tax obligations carry on as normal. A limited company still needs year-end accounts, and its records must still be kept. See how long to keep business records for the full rules.

A simple checklist

• Work out which route you are in. Must cancel, choose to cancel, or transfer the registration.
• Check the 12-month forecast. For a voluntary cancellation, turnover must be expected to stay below £88,000.
• Bring the books up to date. Every sale and purchase to the cancellation date should be recorded and reconciled.
• Value stock and assets. Use today's buying price and check the £1,000 rule.
• Apply online or on form VAT7. Act within 30 days if you are no longer eligible.
• Keep charging VAT until confirmed. Then stop from the cancellation date and update your invoices.
• File and pay the final return. Then keep the records for 6 years.