Avoiding a VAT deregistration headache

Deregistration

A business can deregister if it expects that taxable sales in the next twelve months will be less than £83,000. Taxable sales include sales where the business charges 0%, 5% or 20% VAT. They will ignore any sales that are exempt from VAT - such as rental income on a buy-to-let property - and also those that are outside the scope of VAT, e.g. most services supplied to overseas business customers.

Deregistration is particularly worthwhile if a business makes standard-rated sales and mainly trades with customers who cannot claim input tax. It also means that they don’t need to worry about complying with Making Tax Digital for VAT, which was extended to all registrations for periods beginning on or after 1 April 2022.

The registration sales threshold of £85,000 and deregistration threshold of £83,000 are both being frozen until at least 2024, possibly permanently. So, a business might have to rejoin the VAT club if they increase prices due to inflation etc.

Solution

There is good news for our sole trader. When they calculate their annual turnover at the end of each calendar month moving forward - to see if they have again exceeded the £85,000 registration threshold - they can exclude all turnover for the period when they were VAT registered. 

Example. Flora the florist deregistered on 31 March 2022 because her new monthly turnover of £6,000 is less than £83,000 a year. At the end of April 2022, her total turnover for the previous twelve months was £94,000, i.e. £8,000 per month from May 2021 to March 2022 and £6,000 for April 2022. As far as the registration threshold is concerned, the relevant figure is £6,000 because she can ignore the turnover of £88,000 that was relevant to the period when she was registered for VAT. She does not have a registration problem.

Forward looking test

Our sole trader must be aware of the second VAT registration test, based on their future sales. Basically, if a business expects that its taxable turnover in the next 30 days alone will exceed £85,000, it needs to register at the beginning of the 30-day period. This rule ensures that VAT is paid on a large future order, i.e. the sudden blip in sales that was not expected.

However, they could avert a registration problem by splitting a large order into different months so that the 30-day rule is never breached. For example, if an unregistered builder gets a one-off big job for £100,000, they could spread the invoicing and payments over, perhaps, two or three months, as the job progresses.

Splitting tax points will hopefully avoid a problem with the forward-looking test but might cause a problem eventually, i.e. with the historic test based on sales for the previous twelve months.