VAT deregistration: count the stock before closing the return

When cancellation can or must happen

The current general guide allows a business to ask HMRC to cancel its registration if its taxable turnover falls below £88,000. Notice 700/11 expects a voluntary request to be backed by evidence of the taxable turnover expected over the next 12 months, so keep the forecast, order book or other support with the application.

Cancellation becomes compulsory when a business is no longer eligible to be registered. It must then ask HMRC to cancel within 30 days.

The cancellation date and the final return

HMRC confirms the date cancellation takes effect. Until that confirmation arrives, the business continues to charge and account for VAT. From the effective cancellation date it stops charging VAT, and it submits a final return covering the period up to that date.

Cancellation does not clear VAT already owed. The final return also does not need to wait for every purchase invoice. Notice 700/11 sets out a route for recovering eligible VAT on invoices received later, subject to evidence and restrictions.

The £1,000 test measures VAT due

On cancellation, stock and tangible assets the business keeps need assessing as a deemed supply where VAT was reclaimed or recoverable on their purchase. The current general guide brings that VAT into the final return when the total VAT due is over £1,000. Notice 700/11 details which goods are included, the exclusions and how transfers of a going concern are treated.

Section 7.8 of the notice normally values included goods at what similar goods in their present condition would cost. If that cannot be determined, production cost is used. Depreciated book value is not the measure, and neither is the input VAT originally reclaimed.

If the total VAT is £1,000 or less, none is due. Once it exceeds £1,000, the VAT on all included goods enters the final return, including the first £1,000. Where every item is standard-rated at 20%, VAT of £1,000 corresponds to included goods valued at £5,000 before VAT, or £6,000 including VAT.

Hypothetical example: £6,000 of retained goods

In this hypothetical, a fully taxable business keeps stock and equipment on which purchase VAT was recovered. Every item is standard-rated at 20%. Present-condition values, excluding VAT, total £6,000.

Deemed VAT of £1,200 is above £1,000, so the full £1,200 goes on the final return. Entering only the £200 above the threshold would understate it. The values come from present-condition costs, not from depreciated book values.

The example deliberately leaves out land, opted property, capital goods scheme adjustments, partial exemption, transfers of a going concern and special schemes. Any of these can change the outcome.

Building the closing stock file

Before the final return, assemble one file that supports the figure entered. A practical version holds the items below.

Capital goods scheme items need their own adjustment review alongside this file. HMRC's VAT output tax toolkit is a further published reference for checking output tax entries before the final return goes in.

• The count date, who counted and the count sheets
• Each item kept, with whether purchase VAT was reclaimed or recoverable
• The basis for each present-condition value, such as current prices for similar goods, or production cost where that value cannot be found
• Items excluded under Notice 700/11 and the reason for each
• HMRC's confirmation of the effective cancellation date
• The final return working, showing total VAT due and the £1,000 test
• A log of purchase invoices received after cancellation, for any later recovery claim