De-Registering For VAT , When Sales Drop Below £88,000
- Atlas Tax
- 3 days ago
- 15 min read
De-Registering for VAT When Sales Drop Below £88,000
You can apply to de-register for VAT if your taxable turnover has fallen below £88,000 and you reasonably expect it to remain below that level for the next twelve months. The deregistration threshold for 2026/27 is £88,000. This is distinct from the registration threshold, which sits at £90,000. HMRC will cancel your registration from the date agreed, or from a later date you request.
De-registration is not automatic. You need to apply, and there are conditions, consequences, and a few decisions to make before you do. Getting those decisions wrong can cost you more in VAT than staying registered would have.
The Threshold Figures for 2026/27
The two key figures are:
The compulsory registration threshold is £90,000. If your taxable turnover exceeds this in any rolling twelve-month period, you must register.
The deregistration threshold is £88,000. If you are already registered and your taxable turnover falls below this, you can apply to cancel your registration, provided you believe taxable turnover will remain below £88,000 for the next twelve months.
You can ask HMRC to cancel your VAT registration if your taxable turnover falls below the deregistration threshold of £88,000. HMRC will cancel your registration if they are satisfied you meet the conditions.
These thresholds have remained stable since April 2024 and are confirmed for 2026/27. There is no confirmed change for 2027/28 at the time of writing, though thresholds are reviewed annually at each Autumn Budget.
When Can You Apply to De-Register?
The main condition is that your taxable turnover for the next twelve months will not exceed £88,000. HMRC requires a reasonable expectation, not a guarantee.
The reasons for a drop in turnover vary considerably. A sole trader in construction who has lost a major subcontract, a retailer who has downsized, a freelancer who has reduced their hours, or a landlord who has moved from commercial to exempt residential lettings are all common scenarios. What matters is that the fall is genuine and that you can demonstrate it is not simply a temporary blip.
You can also apply to de-register if you have stopped making taxable supplies entirely, even if turnover previously exceeded the threshold. This covers businesses that have ceased trading, changed the nature of what they do, or converted their commercial property to residential use.
One situation that catches people out is the voluntary registration that is no longer worth keeping. If you registered voluntarily when your turnover was below the threshold because, say, most of your clients were VAT-registered businesses and input tax recovery was beneficial, and that position has now changed, you can de-register provided you are below the deregistration threshold.
How to Apply: The VAT 7 Form
De-registration is requested by completing form VAT 7, which is available through HMRC's VAT online services. If you use Making Tax Digital-compatible software, your agent may be able to submit it on your behalf. If not, a paper form can still be requested.
You will need to state the reason for deregistration, confirm the date from which you want cancellation to take effect, and provide your last period's figures if relevant.
HMRC typically processes de-registration within three to five weeks, though it can take longer. Once confirmed, HMRC will issue a certificate confirming your deregistration date. Do not stop charging VAT until that date has been confirmed in writing.
You must continue to charge and account for VAT until HMRC confirms your deregistration date. If you stop charging VAT before receiving confirmation and then find your application has been delayed or refused, you could face an assessment for the VAT that should have been charged.
The Final VAT Return and the Output Tax on Business Assets
This is where many businesses make a costly mistake.
When you de-register, you are treated as having made a deemed supply of all business assets that you still hold on the deregistration date. This includes stock, equipment, vehicles, and any other assets on which you previously claimed input VAT. The deemed supply is taxed at the current rate.
When a business deregisters, HMRC treats it as having supplied all business assets still held at the deregistration date at their current open market value. VAT is due on this deemed supply unless the total VAT payable is £1,000 or less, in which case no output tax is due.
That £1,000 de minimis is calculated on the VAT amount itself, not the asset value. So if assets would generate up to £5,000 of open market value (at 20% standard rate, that is £1,000 of VAT), the business avoids the charge. If the assets are worth £6,000, the output tax is £1,200 and must be accounted for on the final return.
For a small trader in Bolton who runs a few vans and holds a reasonable amount of stock, this can easily amount to a meaningful VAT bill on the final return. It is worth calculating this before you de-register to avoid a surprise.
There is a practical way to manage this where timing allows. If assets can be legitimately disposed of before deregistration, whether by selling them, consuming stock in normal trading, or writing off items that have zero value, the pool of assets subject to the deemed supply reduces. There is nothing wrong with planning your deregistration date to follow a planned asset disposal, so long as the disposal itself is genuine.
Input Tax You Have Already Claimed: Do You Need to Repay It?
The short answer is: sometimes, yes.
Capital goods scheme adjustments apply if you de-register within the adjustment period for any capital item covered by the scheme. The capital goods scheme applies to:
Land and buildings with a VAT-inclusive value of £250,000 or more, with a ten-year adjustment period.
Computers and computer equipment with a VAT-inclusive cost of £50,000 or more, with a five-year adjustment period.
Aircraft, ships, and other vessels, with a five-year adjustment period
If you acquired any of these items within the relevant adjustment period and claimed full input tax, the deemed supply on deregistration and any remaining adjustment periods will interact to produce a VAT calculation. This is not complicated in principle, but it does require careful attention to the original claim and how many intervals remain.
For most small businesses, the capital goods scheme is not in play. But for a commercial landlord who opted to tax a property worth over £250,000 and then moves to exempt residential use (removing the ability to recover input tax going forward) and applies to de-register, the capital goods scheme calculation is almost certainly relevant.
Beyond the capital goods scheme, there is no general obligation to repay input tax you have legitimately claimed during your registration period simply because you de-register. The input tax recovery on day-to-day running costs incurred while registered is not subject to clawback on deregistration.
The Pricing Decision: Can You Lower Your Prices or Not?
For many businesses, this is the commercial question that actually drives the de-registration decision.
If your customers are mostly end consumers (the public, domestic buyers, exempt businesses), removing VAT from your prices gives you the ability to offer lower prices, or to improve your margin while keeping prices where they are. A painter and decorator with mostly domestic clients charging £1,200 for a job (which includes £200 of VAT) can, post-deregistration, charge £1,000 for the same job without the VAT component. That may help with competitiveness, especially against non-registered sole traders in the same market.
If your customers are mostly VAT-registered businesses, the calculus is different. They are recovering the VAT you charge anyway, so removing it from your invoices does not reduce their cost. What it does is remove your ability to recover input VAT on your own purchases. If you spend significantly on materials, subcontractors, software, or equipment, you will lose that recovery. In some cases, the input tax recovery gained by staying registered outweighs any administrative saving from de-registering.
This is not a hypothetical scenario. I have seen e-commerce businesses serving primarily B2B customers make the mistake of de-registering when turnover dipped, only to find that the input VAT they were recovering on their fulfilment costs, packaging, and advertising was worth keeping the registration open.
The break-even question is: how much input VAT are you recovering each year? If it is more than the administrative cost of staying registered, de-registering is a net financial loss.
Partly Exempt Businesses: An Additional Layer
If your business makes both taxable and exempt supplies, de-registration has an additional dimension. While registered, you can only recover input tax on costs that relate to taxable supplies, subject to the partial exemption rules.
If de-registration means you are no longer making any taxable supplies (for example, a landlord who has moved entirely into residential lettings), the question of input tax recovery becomes moot for future costs. The deemed supply rules still apply at deregistration to assets on which input VAT was claimed.
If you are partly exempt but still making some taxable supplies, the deregistration threshold still applies to taxable turnover only, not total turnover including exempt supplies.
A property business making mixed commercial and residential supplies is a good example. The commercial rental income is taxable (assuming an option to tax has been exercised). The residential rental income is exempt. Only the taxable figure counts towards the registration and deregistration thresholds. If taxable commercial rent falls below £88,000 while total income (including residential) remains much higher, deregistration may still be available based on the taxable element alone.
After Deregistration: Record Keeping and Late Input Tax Claims
Your VAT records must be kept for six years from the deregistration date, even though the business is no longer registered. HMRC can still investigate your VAT affairs for that period.
There is also a provision to reclaim input VAT on purchases made before deregistration that were not included in the final return, but only where you did not have the invoice at the time of deregistration. This must be claimed by writing to HMRC directly, not through the VAT system.
In practice, this is relatively rare, but it does arise where a supplier issues a late invoice after the final return has been submitted.
Practical Checklist Before Applying
Work through the following before submitting form VAT 7:
Confirm your taxable turnover for the previous twelve months and for the next twelve months. Document why you expect it to remain below £88,000.
Calculate the open market value of all business assets you hold (stock, equipment, vehicles) and estimate the VAT on that deemed supply. If it exceeds £1,000, this must go on your final return.
Decide whether deregistering is financially beneficial, taking into account the loss of input tax recovery on future purchases.
Check whether any capital goods scheme assets are within their adjustment period.
Confirm the date you want deregistration to take effect and choose it carefully, ideally after any large asset disposals are complete.
Continue charging VAT at the current rate until HMRC issues written confirmation of your deregistration date.
File your final VAT return on time and include any output tax arising from the deemed supply.
Retain all records for six years from the deregistration date.
Key Takeaways
The deregistration threshold for 2026/27 is £88,000 of taxable turnover. If you expect taxable turnover to remain below this for the next twelve months, you can apply to cancel your VAT registration using form VAT 7.
De-registration triggers a deemed supply of all business assets held at that date. VAT at the standard rate applies on the open market value of those assets unless the total VAT is £1,000 or less.
Deregistration is not automatically beneficial. If you recover significant input VAT on purchases and your customers are themselves VAT-registered, staying registered may cost you less than leaving.
You must keep charging VAT and accounting for it until HMRC confirms your deregistration date in writing. Do not stop early.
VAT records must be retained for six years after deregistration.
FAQs
Q1: Does a business need to show that its past sales have already fallen below £88,000, or is it enough to expect future sales to drop below that level?
A1: Well, this is one of the most important distinctions in the whole deregistration process, and getting it wrong can lead to a rejected application. HMRC operates a forward-looking test for voluntary deregistration. A business can apply to deregister if it reasonably expects its taxable turnover to fall below £88,000 in the next twelve months from the date of the application, even if the last twelve months' turnover was above that level. Past turnover below £88,000 is not required. However, reasonable expectation is not a vague wish. HMRC will want to be satisfied that the expectation is grounded in genuine commercial reality, and they can and do ask for supporting evidence.
A business that submits a deregistration application with no supporting rationale for the expected fall is likely to receive questions, or an outright refusal. Supporting evidence might include a contract that has ended and not been replaced, a reduction in the customer base, or documented evidence of a shift in business model toward exempt activities. A one-off spike in sales that pushed turnover above £90,000 but is unlikely to recur is a legitimate basis for a deregistration application, but the business must be prepared to explain and evidence that position to HMRC if asked.
Q2: If a business holds stock worth £6,000 and equipment worth £5,000 at the deregistration date, what is the VAT position on those assets?
A2: This is the deemed supply rule, and it catches a significant number of businesses by surprise at deregistration. Under paragraph 8 of Schedule 4 to the VAT Act 1994, a business deregistering from VAT is treated as having made a supply of all business assets on which input VAT was previously recovered. That deemed supply is valued at the current market value of the assets on the deregistration date, not what they originally cost. In the example above, the stock of £6,000 and equipment of £5,000 have a combined value of £11,000. At 20% VAT, the output tax would be £2,200. Because this exceeds the £1,000 de minimis threshold, the full £2,200 must be accounted for on the final VAT return.
The de minimis point is important: if the total VAT on all assets and stock is below £1,000, nothing needs to be declared. But if it exceeds £1,000, the full amount is due, not just the excess over £1,000. Note also that market value is not the same as original cost. A piece of equipment bought for £8,000 but now worth only £2,000 due to wear and tear generates VAT based on the £2,000 current value, not the original purchase price. Keeping an accurate and current asset register is therefore not just good bookkeeping: it directly affects how much VAT is due on the final return.
Q3: Does the deemed supply rule at deregistration apply to assets on which no input VAT was ever reclaimed?
A3: In my experience with clients who have a mix of vatable and non-vatable assets, this question comes up regularly and the answer is no. The deemed supply rule only applies to assets on which VAT was originally recovered. If the input VAT was blocked (for example, on a car that is not used exclusively for business purposes), or if no VAT was ever incurred on the purchase (perhaps because it was bought from a private individual), there is no deemed supply liability on that asset at deregistration. Similarly, if a business purchased assets before it was VAT-registered and therefore never claimed any input tax on them, those assets fall outside the deemed supply calculation.
The logic of the rule is essentially a clawback mechanism: HMRC gave the business the benefit of recovering input VAT on those assets at the time of purchase, and the deemed supply at deregistration recovers some or all of that benefit when the business leaves the VAT regime. Where no benefit was taken, there is nothing to claw back. For businesses with a mixed asset base, it is worth going through the asset list methodically before the final return is prepared, separating assets on which VAT was recovered from those on which it was not, and only including the former in the deemed supply calculation.
Q4: Can HMRC refuse a deregistration application, and what should a business do if that happens?
A4: Yes, HMRC can and does refuse deregistration applications where it is not satisfied that the forward-looking test is genuinely met. If HMRC believes that a business's taxable turnover in the next twelve months is likely to exceed £88,000, it will reject the application and write to explain why. This most commonly happens where the business has shown consistently strong and growing turnover, where there is no obvious explanation for the expected fall, or where the application appears to be driven by a desire to avoid VAT administration rather than a genuine change in commercial circumstances.
A refusal is not the end of the road. The business can reapply when circumstances have changed further, can request HMRC reconsiders if they believe the decision was based on incorrect information, or can appeal if the refusal appears unlawful. The practical approach when a refusal seems likely in advance is to submit the application with a detailed covering letter and supporting documents: cancelled contracts, client communications confirming reduced orders, projected income calculations, and any other evidence that demonstrates the expected fall is real. Applications submitted without supporting reasoning are more vulnerable to refusal than those that tell a clear commercial story from the outset.
Q5: What is the correct effective date of deregistration, and why does choosing the wrong date cause problems?
A5: The effective date of deregistration determines the precise point at which VAT obligations cease, and choosing it carelessly can create either an underpayment of VAT or an unnecessary over-collection from customers. HMRC generally sets the effective deregistration date as the date on which the application is received, unless the business requests a later date. A retrospective date is not permitted for voluntary deregistration based on falling below the £88,000 threshold. The effective date is the date from which the business stops being a taxable person, which means any sales made on or after that date must not include VAT charges, and any VAT included in invoices issued after that date must be repaid to customers unless VAT-inclusive pricing was agreed. Getting the date wrong in practice usually plays out in one of two ways.
A business agrees a deregistration date of, say, the 15th of the month but continues issuing VAT invoices for another two weeks because the admin team was not informed promptly. The business then collects VAT it has no right to charge, which must be repaid to HMRC on the final return and refunded to customers. Alternatively, a business deregisters too early and then finds a large sale falls due, which should have been VAT-charged but now cannot be, because the business is no longer registered. Coordinating the deregistration date with the forward order book and informing all relevant staff on the same day is not optional planning: it prevents a class of error that is surprisingly common.
Q6: How does the deregistration of a VAT-registered business affect its B2C retail customers versus its B2B trade customers?
A6: The commercial impact of deregistration differs fundamentally depending on who a business's customers are, and this analysis should always be done before submitting the VAT7 form. For a business that sells primarily to private consumers, who cannot recover VAT, deregistration is almost always beneficial from a pricing standpoint. The business can choose to reduce its prices by the equivalent of the 20% VAT it was previously charging, making itself more competitive, or it can maintain the same consumer-facing price and absorb an improved margin. Either way, the consumer pays the same or less, and the business is better off. A beauty salon, a personal trainer, or a domestic cleaning company with no VAT-registered clients would typically find deregistration commercially straightforward.
For a business that sells predominantly to VAT-registered trade customers, the picture is the opposite. Those customers currently recover the VAT charged, so it costs them nothing in net terms. After deregistration, the selling business cannot charge VAT at all. If it maintained the same net price, the trade customer's cost remains the same and the business keeps slightly more of its income. But the business now loses the ability to recover input VAT on its own purchases, which is often a significant cost in trades with high material expenditure. A joinery workshop, for instance, spending £30,000 a year on timber and fittings, would lose the ability to recover £6,000 of VAT annually. That loss must be factored into any decision to deregister.
Q7: Can a business that currently uses the VAT Flat Rate Scheme continue on that scheme after applying to deregister?
A7: No. Membership of the Flat Rate Scheme is contingent on being VAT-registered, and deregistration from VAT automatically ends FRS membership at the same time. The final VAT return under the Flat Rate Scheme covers the period up to the deregistration date. One area worth understanding here is the interaction between the Flat Rate Scheme and the deemed supply rule on assets. Under the FRS, a business accounts for VAT as a fixed percentage of its gross turnover rather than tracking individual input and output VAT amounts. However, the deemed supply on assets at deregistration operates outside the FRS calculation.
On the final return, the business must calculate the deemed supply in the normal way (market value multiplied by the standard VAT rate), not using the flat rate percentage, and add that figure to the output tax calculated under the FRS for the final period. A business on the FRS with, say, £12,000 of stock on hand at deregistration must account for £2,400 of output VAT on that stock separately, even though it may have been paying a flat rate of only 11% or 12% on its turnover throughout its registration. This catches a number of FRS users off guard, particularly sole traders in trades with significant stock levels.
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