Have you become VAT registered and opted to tax a commercial premise purchase unnecessarily and wonder if it’s possible, or what the consequences would be, to deregister? It’s firstly important to note that there is a common misconception that a business must opt to tax to enable themselves to recover the VAT spent on the purchase of land or a building. While there are some circumstances where it is necessary to opt to tax, this is by no means always true.
The basic criteria for claiming input tax back, is that the VAT has been incurred in the making of taxable supplies. There is an important distinction to make between whether you are buying a property with the intention of using it to trade from yourself or let to tenants under a licence to occupy. A business buying a commercial property to be let to tenants under a licence to occupy will be making a supply “of the land”, and therefore, unless they opt to tax their interest in that building, tax recovery will be restricted. However, a business buying and making taxable supplies themselves, i.e. selling products out of the property, will have no need to opt to tax to be able to claim the VAT back on the purchase of the building.
If you have registered mistakenly and are continuing to make taxable supplies, it is possible to deregister as long as you are able to satisfy HMRC that your taxable turnover for the next 12 months will not be more than the VAT deregistration threshold, currently set at £83,000. If your historic turnover is below this limit, and you have no anticipated changes to the business planned that would lead to an increase in turnover, it would be reasonable to expect that your turnover will remain below £83,000 and HMRC will likely agree to deregistration. It is important to note that where you are continuing to trade, the earliest date from which the HMRC will allow an application to deregister is the date it receives it. While a later can be agreed if necessary, an earlier one will not.
The consequence of deregistering whilst still in possession of a business property that the VAT has been reclaimed, is that you will need to pay output tax based on the current market value (not the initial purchase price) of the building. This figure will need to be included on your final VAT return and paid to HMRC. This is because of Schedule 4, paragraph 8 of the VAT Act 1994 which deems a supply of goods to take place when a person stops being a taxable person and has goods still on hand which form part of the businesses assets and on which input tax has been allowed.
HMRC VAT Manual VATSCO3360 “identifying a supply: Supplies of goods for no consideration: Goods which are business assets on hand at deregistration” provides detailed guidance on this matter. The link is here to the VAT notice.
The final point to note is that if you think this might apply to you and are within 6 months of the effective date of when you opted to tax, it can be possible for the option to be revoked. VAT Notice 724A: Option to Tax provides details of the conditions required to be met to revoke an option to tax within the six month “cooling off” period in section 8.1.2 and Paragraph F. The revocation is notified to HMRC on Form VAT1614C. The person revoking must meet all the conditions in 8.1.2 and one of the three conditions in Paragraph F in the following link is here.
If you meet all the conditions in 8.1.2 and a condition of Paragraph F, and the opt to tax is revoked prior to deregistration, then the deemed supply on deregistration would be exempt. This is one point that highlights the complexities of VAT and property. We highly recommend property transactions are considered thoroughly before they take place to ensure that the best VAT position can be achieved, so you may prefer to take advantage of our free consultation before embarking on your next move.