In previous Blogs I have warned readers of the pending VAT change on 1st April 2022, when HMRC’s much heralded Making Tax Digital (MTD), will be extended to businesses that have voluntarily registered for VAT; even though their turnover does not exceed the compulsory registration threshold of £85,000. It is now time to seriously consider the option of deregistration for these businesses as soon as possible.
Any business can register for VAT at any time if it is either making or intending to make taxable sales. Indeed, many businesses are VAT registered with annual taxable sales that have always been less than the £85,000 threshold.
There are also some businesses that have no sales for a number of years; for example, a forester who plants his land with saplings, would have to wait for the trees to mature, before making sales of wood in the future. But during this wait the forester would be incurring Input VAT, which he would want to reclaim.
There are two principle reasons for voluntarily registering for VAT:
- Reclaiming Input VAT – All businesses incur VAT costs and even in small businesses, this can be significant, However, the ability to claim input tax on expenses is usually only worthwhile if a business is making zero-rated sales (eg: a bakery selling zero rated bread or takeaway sandwiches).
Even if your business makes standard rate sales, opting to VAT register can still work out very well, if all or most of your customers are themselves registered for VAT and thus able to claim input tax.
- Status – One of the main reasons why an individual or a partnership, switches to a limited company is to create the impression that they’re a bigger concern than they actually are. They also tend to register for VAT immediately, the reasoning being that having a VAT number can help with giving extra credibility to a small business to convey the message that “we are serious players”.
In other words, it’s all about their perceived status.
MTD extended to voluntary registrations
The MTD system of reporting online to HMRC is being extended to voluntary registrations and will be compulsory for all VAT registrations for periods starting on 1st April 2022 or later.
There are in excess of 200,000 voluntary VAT registered businesses and HMRC estimates that only one-third of them already have the bookkeeping system and software in place to be MTD compliant.
For those businesses who adopt spreadsheet accounting, the extra hurdle of downloading bridging software to complete the electronic submission process should not be a major problem.
However, the looming issue is with the remainder of businesses who prepare their accounts manually with the owner or owners not being tech savvy and having very little knowledge regarding computers and software systems.
Leaving the VAT Club: Deregistration option
The only legal way to avoid the MTD compliance issues and escape the extra bookkeeping requirements and additional quarterly reports to HMRC is to deregister and leave the VAT club. A business can deregister if it expects its taxable sales will be less than £83,000 in the next 12 months.
This decision on whether or not to leave the VAT Club, will in the main come down to whether the loss of input tax suffered by deregistering will be greater than the extra cost and time of complying with MTD. However, it would be unwise for a growing business to deregister if it expects to exceed the threshold in the next couple of years, as it will then have to go through the registration process again.
VAT on stock and assets
If you decide that deregistration is your best option, before you start completing the paperwork to leave the club thus avoid MTD, make sure that there are no big output tax liabilities on stock and assets still owned on the final date of registration.
Output tax is payable on the market value of stock and assets if input tax was claimed when they were initially purchased. There is a de-minimis VAT figure of £1,000, so if the market value of all stock and assets subject to a VAT charge is £5,000 or less, then no output tax is payable on the final VAT return.
Cash accounting scheme (CAS)
If your business uses the cash accounting scheme, you will need to account for output tax on closing debtors on your final VAT return if you deregister. To partly counterbalance this, you can also claim back input tax on closing creditors.
There could be a potential problem if any debtors become a subsequent bad debt issue, but any output VAT accounted for on this debt can be reclaimed by submitting form VAT427 to HMRC; which could be well after the date of deregistration.
Leaving the VAT Club: Will there be a delay?
Whenever HMRC makes a major change in any area of tax, they often don’t think through all the consequences of their proposed actions, and when the blindingly obvious is pointed out, usually by the accounting profession they often delay its implementation by a few months and in some cases, a few years.
There is therefore a possibility of the 2022 introduction date for MTD being delayed somewhat because of the coronavirus crisis. But as the date has already been put back twice, I think this unlikely a third time.
So if you want to put up with additional cost and hassle by staying in the VAT club fine, but if you are thinking of leaving now is the time to think about it and ideally also take advice from your accountant.
So, while you’re thinking about it, remember, the countdown has started!