VAT Deregistration: Why It Could Cost You More Than You Think
As businesses continue to recover from difficult trading conditions, particularly in hospitality and service sectors, many smaller businesses find their turnover falling below the VAT deregistration threshold—currently set at £88,000 per annum. On the face of it, deregistering from VAT seems like a sensible way to save money and boost competitiveness. But what many do not realise is that deregistering can trigger unexpected VAT bills that may significantly outweigh any short-term gains.
In this article, we explain what happens when you deregister for VAT, the hidden costs involved—especially under the Capital Goods Scheme (CGS)—and when it may be wiser to stay VAT registered.
Why Deregister?
A business that falls below the deregistration threshold might consider cancelling its VAT registration for one or more of the following reasons:
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Increase profit margins: By keeping prices the same but no longer charging VAT, a business retains the VAT portion as profit.
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Become more competitive: By reducing prices to reflect the removal of VAT, the business may become more attractive to customers.
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Simplify administration: Fewer VAT returns and compliance obligations.
This sounds appealing—particularly for businesses whose customers are members of the public and cannot reclaim VAT themselves, such as in hospitality or personal services.
The Hidden VAT Trap: Deregistration and Output VAT on Assets
What is often overlooked is that VAT-registered businesses must account for VAT on any assets still on hand at the point of deregistration, if:
- The VAT value of those assets (not the purchase price) exceeds £1,000, and
- VAT was originally reclaimed on those assets
This includes:
- Stock
- Capital equipment
- Fixtures and fittings
- Commercial property where VAT was previously recovered
The business must calculate the current market value of these assets and repay VAT to HMRC on that value.
The Capital Goods Scheme (CGS): A Further Risk
The Capital Goods Scheme adds another layer of complexity. It applies to:
- Land and property purchases (and related work) costing more than £250,000, including VAT
- Refurbishments and improvements of property assets above the same threshold
CGS works by adjusting the amount of input VAT reclaimed over a ten-year period, depending on how the asset is used (for taxable or exempt purposes). If the use of the asset changes, or you deregister during that ten-year period, you may have to repay part of the VAT reclaimed.
A Real-World Example: An Expensive Deregistration
Let’s look at Mr and Mrs Brown, who own a small seaside hotel.
- They purchased it four years ago for £400,000 + VAT (£80,000) and recovered the VAT in full because their business was fully taxable.
- Their turnover was initially £90,000 p.a. but has dropped to £62,000, below the deregistration threshold.
- They’re considering deregistration to save the VAT and increase profit margins.
At first glance, this looks smart—they could save around £9,234 in VAT by increasing profits through deregistration (£62,000 x 7/47, where 7/47 is the VAT element of gross income).
However, deregistering triggers two major issues:
1. VAT on Remaining Assets
They must repay VAT on the value of stock, fixtures, and fittings—possibly a few thousand pounds.
2. Capital Goods Scheme Adjustment
The property is in year four of the ten-year CGS adjustment period. If they deregister now, the hotel is deemed to shift from taxable use to exempt use, requiring a VAT adjustment:
- VAT recovered: £80,000
- Years remaining: 6 out of 10
- Adjustment: £80,000 x 6/10 = £48,000 payable back to HMRC
So, for the sake of a short-term £9,000 saving, they would face an immediate £48,000+ VAT liability—a clearly unviable option.
Even trying to “opt to tax” at the point of deregistration wouldn’t help—they’d still have to pay VAT on the market value of the property, which could exceed the original £80,000 claimed.
When It Might Be Better to Stay Registered
This example highlights a critical point: deregistering from VAT is not always a financial win—especially where:
- You’ve purchased high-value property or capital assets
- You have substantial stock or equipment on hand
- The CGS is in play
In many cases, especially for asset-heavy businesses or those in property, remaining VAT registered is the more practical, cost-effective choice.
By continuing to trade and stay VAT registered, businesses can:
- Avoid triggering CGS repayments
- Continue reclaiming input VAT on ongoing costs
- Wait until turnover picks up and passes the VAT registration threshold again, restoring profitability
Summary: Key Considerations Before Deregistering for VAT
| Factor | Impact on Deregistration |
|---|---|
| Turnover under £88,000 | Eligible to deregister voluntarily |
| Stock and equipment value | VAT must be repaid on assets if VAT value > £1,000 |
| Property > £250,000 | CGS applies—repayment of VAT likely if within 10-year window |
| Input VAT on future costs | Cannot be reclaimed once deregistered |
| Opting to tax property | Triggers VAT liability on market value at deregistration |
| Profit margin benefits | Can be offset or eliminated by VAT repayment liabilities |
Final Thoughts
The decision to deregister from VAT should not be based on turnover alone. While it may offer short-term profit improvement, the hidden costs of CGS adjustments and VAT on remaining assets can outweigh the benefits—especially for businesses owning commercial property or with high-value equipment.
If you’re considering VAT deregistration or are unsure of your liabilities under the Capital Goods Scheme, speak to Merranti Accounting. Our VAT specialists can guide you through the process, assess the implications for your business, and help you avoid unexpected costs.
Contact Merranti Accounting today for a VAT review before you make a decision that could cost your business thousands.
