MTD – the options for those operating near or below the VAT threshold

15th September 2018

Many of our clients operating near or below the VAT threshold are questioning whether the introduction of MTD in April 2019 might be the trigger for them to reconsider whether they need to be registered for VAT or not.

To deregister will save them from potentially having to make further investment in accounting software ....and there is the time it takes to compile and maintain these records.  Many of our clients who find themselves in this situation are also those who appreciated the benefits of the “Flat Rate” scheme; an incentive now greatly reduced.

The current threshold for when you have to register for VAT is £85,000, and the de-registration threshold is £83,000. This means that if your business makes VATable sales of £85,000 or more during any rolling 12-month period you will have to register it for VAT. And if you are already currently registered for VAT, you will be able to de-register when your business makes sales of £83,000 or less during any 12-month period (and you’re confident that this will continue to be the case in the following 12-month period).

But before you start to think that opting out is going to be the simpler course of action, we suggest you consider the following:

1.       Why you registered for VAT in the first place

If you have registered for VAT and you were not required to do so, it was probably for one or all of the following reasons:

- Customers/clients are primarily corporates rather than private individuals.  They can reclaim the VAT charged and so it makes no different to them whether you are VAT registered or not;

- You have significant operating or investment costs which allow you to reclaim the input VAT;

- Charging VAT was part of your professional image, making your business look more substantial;

- You benefitted from the original flat rate scheme.

Before making any decisions about deregistering, it is worth reviewing the reasoning behind your initial registration and whether the motivation still applies.

2.     We do not know what the future holds in terms of VAT

The majority of other European countries have a much lower threshold for registration.  For example, Germany requires you to register for VAT at €17,500.  Some countries also distinguish between goods and services.  For example Ireland has a threshold of €75,000 for goods but requires registration for services at €37,500.
Although there is no reason to believe that HMRC will introduce lower thresholds for VAT in the near future, it is always a possibility. 

3.     Beware assets value if temporarily deregistering

If you are thinking of deregistering for a temporary period only, you need to be aware that if the VAT on the current value of your business's assets (such as equipment or stock) is more than £1,000 at the time of deregistration, it has to be repaid to HMRC (if you reclaimed the VAT when you bought them). This could effectively eliminate the savings you were intending to make. This point is less problematic if you are intending to deregister permanently, but it is important to be aware of it.

4.     The capital goods scheme

Another factor to be aware of before deregistering is the capital goods scheme (CGS). The CGS applies to the purchase of land or buildings – and to the refurbishment or extension of existing buildings – where the cost is more than £250,000 and you have reclaimed VAT on it. For the ten years following the reclaiming of the VAT there is an 'adjustment period', during which you will have to repay some of the VAT you originally reclaimed if you decide to deregister for VAT.

Take advice

Certainly with MTD looming on the horizon, if your turnover is or is about to fall below the limit of VAT registration, it may indeed look an attractive proposition to make life that bit simpler and deregister for VAT.  However, we suggest an element of caution and before you come to a decision, we invite you to talk to us about your particular circumstances – we would be delighted to assist you.