VAT Deregistration: When and How to Cancel VAT

You must cancel your VAT registration if you stop trading or stop making VAT taxable supplies, and you can choose to cancel it if your taxable turnover is expected to stay below the deregistration threshold. Cancelling is done online with HMRC, followed by a final VAT return that may include VAT on the stock and assets you still hold. This guide covers when deregistering makes sense, the steps, and the costs people often miss.

Key takeaways

• Compulsory cancellation: tell HMRC within 30 days if you are no longer eligible to be registered.
• Voluntary cancellation: available when taxable turnover is expected to be below the deregistration threshold (£88,000 at the time of writing).
• Your final return may include VAT on stock and assets on hand if that VAT is over £1,000.
• From the cancellation date you must stop charging VAT.
• Keep your VAT records for 6 years after deregistering.

What is VAT deregistration?

VAT deregistration means cancelling your VAT registration with HMRC, so that you are no longer a taxable person for VAT. After the cancellation date you do not charge VAT on your sales, you cannot reclaim VAT on your purchases, and you no longer submit VAT returns. The process and conditions are set out on GOV.UK under cancel your VAT registration.

When you must cancel

You must cancel your registration if you are no longer eligible to be VAT registered. The usual reasons are:

• You stop trading altogether.
• You stop making VAT taxable supplies, for example by moving to exempt activities only.
• You sell the business.
• The legal status of the business changes, such as a sole trader incorporating, unless the registration is transferred to the new entity.
• You join a VAT group.

In these cases you must tell HMRC within 30 days. Leaving it longer can lead to a penalty. If you are closing a company, deregistration is one of several steps. See our guide to options for closing a limited company.

When you can choose to cancel

If you are still trading, you can ask HMRC to cancel your registration when your VAT taxable turnover for the next 12 months is expected to be below the deregistration threshold. That threshold is set a little lower than the registration threshold. At the time of writing they are £88,000 and £90,000 respectively, but confirm both on the GOV.UK VAT thresholds page before deciding. Our guide to the VAT registration threshold explains how taxable turnover is measured.

HMRC needs to be satisfied that the fall is real. A temporary dip or a planned break in trading is not normally enough on its own, and deliberately suppressing or splitting turnover to stay under the limit is not acceptable.

Should you deregister? Staying in vs leaving

As a broad rule, deregistering tends to suit businesses that sell mainly to the public and have low VAT-bearing costs. It tends not to suit businesses selling mainly to other VAT-registered businesses, or those with heavy VAT on purchases. The same reasoning, in reverse, is in our article on voluntary VAT registration.

Step by step: how to cancel

1. Forecast your turnover. Prepare a realistic estimate for the next 12 months and keep the workings. HMRC may ask why you expect turnover to be lower.
2. List stock and assets on hand. Identify what you would still hold on the cancellation date and whether VAT was reclaimed on it.
3. Weigh the numbers. Compare the VAT you would no longer charge with the VAT you could no longer reclaim, plus any one-off charge.
4. Apply to HMRC. Cancel through your online VAT account, or by post using the form HMRC provides. Give the reason and the date.
5. Wait for confirmation. HMRC confirms the cancellation date. Continue to charge VAT and keep records until then.
6. Stop charging VAT from that date. Update invoices, quotes, your website, till settings and online platforms. Remove your VAT number.
7. Submit the final VAT return. It covers the period up to and including the cancellation date, and includes any VAT due on stock and assets.
8. Pay the final bill. If you pay by Direct Debit, check whether it will still collect or whether you need to pay another way.
9. Keep your records. VAT records must be kept for 6 years.
10. Monitor turnover each month. Add up the last 12 months every month end, so that you know immediately if you need to register again.

VAT on stock and assets you still hold

This is the cost that surprises people. When you deregister, you are treated as if you had sold the business stock and assets you hold on that day, to the extent that you reclaimed VAT when you bought them. You account for VAT on their current value on your final return. There is an important relief: if the total VAT calculated this way is £1,000 or less, you do not have to pay it.

Items typically caught include unsold stock, tools and equipment, computers, furniture, and commercial vehicles on which VAT was reclaimed. Land and buildings have their own rules and need specific advice. Value items at what it would cost to buy them in their current condition, not at what you originally paid.

Worked example (illustrative)

"Marcus", an illustrative example, runs a small picture framing workshop as a sole trader, selling almost entirely to the public. He lost a large trade contract, and his taxable turnover for the coming year is forecast at £61,000, well under the deregistration threshold. He decides to deregister.

On the planned cancellation date he holds stock of mouldings and glass with a current value of £2,400, and equipment worth £1,800 in its present condition. He reclaimed VAT on all of it. The total value is £4,200, and VAT at 20% on that is £840. Because £840 is not more than £1,000, he has nothing to pay on these items.

Suppose he also held a van on which he had reclaimed VAT, now worth £6,000. The total would be £10,200, the VAT would be £2,040, and the whole £2,040 would go on his final return. That one asset changes the decision, so he would want to think about timing before applying.

Marcus is invented for illustration and is not a real client.

After you have deregistered

• Purchase invoices received later for goods or services supplied while you were registered may still be claimable, using a separate HMRC claim process. Ask before assuming the VAT is lost.
• Review your prices. You can pass the saving to customers, keep it, or split it, but remember that your own costs have risen by the VAT you can no longer recover.
• Your bookkeeping changes. Costs are now recorded including VAT, and the VAT control account should run down to nil once the final return is paid.
• If you used the Flat Rate Scheme, you leave it when you deregister. See flat rate vs standard scheme.

Common mistakes

• Deregistering on a temporary dip. If turnover recovers within months you will have to register again, having paid for the round trip.
• Ignoring stock and assets. The final return can be much larger than a normal quarter.
• Continuing to charge VAT. Old invoice templates are the usual culprit.
• Stopping too early. You remain registered, and must keep charging VAT, until the date HMRC confirms.
• Forgetting the final return. The registration is not finished until it is filed and paid.
• Not monitoring turnover afterwards. Late re-registration can mean paying VAT you never charged your customers.

How we can help

We can model the decision for you, deal with HMRC, and prepare the final return including the stock and asset calculation. VAT returns start from £120 per quarter on a fixed fee. See our VAT Returns service, view our pricing, or contact us before you apply.