When a business cancels its VAT registration, it may need to pay VAT on assets and stock it still owns at the deregistration date.

This does not apply in every case. VAT is only due where the relevant conditions are met, and where the VAT due on retained stock and assets is more than £1,000. However, the rule is often misunderstood because businesses may assume that deregistering for VAT simply means submitting a final VAT return and stopping VAT from that point onwards.

This guide explains how VAT deregistration assets are treated, when stock and assets must be included, how the £1,000 VAT test works, and how any VAT due is dealt with on the final VAT return.

For advice on deregistering for VAT, The VAT People can help you review your position before you cancel your VAT registration.

What happens to assets when you deregister for VAT?

When you deregister for VAT, HMRC may treat some of your stock and assets as if they have been supplied by the business immediately before VAT registration ends. This is known as a deemed supply.

The purpose of the rule is to prevent a business from reclaiming VAT on business assets while VAT registered, then keeping those assets after leaving the VAT system without accounting for output tax.

HMRC’s VAT Notice 700/11 on cancelling your VAT registration confirms that a business may have to account for VAT on business assets and stock on hand when its VAT registration is cancelled.

Do you have to pay VAT back when you deregister?

You may need to pay VAT back when you deregister if:

• You still hold stock or business assets at the deregistration date
• You reclaimed, or could have reclaimed, VAT when buying those assets
• The assets would be taxable if sold
• The total VAT due on the assets is more than £1,000

This is not the same as repaying all input VAT previously claimed. The calculation is based on the current value of the relevant assets at the time of VAT deregistration, not the original purchase price.

Any output VAT due is included on the final VAT return.

What is the current VAT deregistration threshold?

The current VAT deregistration threshold is £88,000. A business can usually apply for voluntary deregistration if it can satisfy HMRC that its taxable turnover will fall below this deregistration threshold in the next 12 months.

This is separate from the VAT registration threshold. The current VAT registration threshold is £90,000. A business may need to register for VAT if its taxable turnover exceeds that amount.

HMRC’s VAT thresholds guidance confirms the current cancellation threshold for VAT-registered businesses.

Which assets are included at VAT deregistration?

VAT on assets at deregistration can apply to stock and tangible business assets that remain in the business when VAT registration ends.

This can include:

• Unsold stock
• Plant and machinery
• Office equipment
• Computers and IT equipment
• Commercial vehicles
• Furniture
• Tools
• Fixtures and fittings
• Certain interests in land or buildings
• Other tangible goods used in the business

The key question is whether VAT was reclaimed, or could have been reclaimed, when the asset was acquired. If input VAT was recovered and the asset is still held when the business cancels VAT registration, the business may need to account for VAT.

A VAT Health Check can help identify which assets should be included before the final return is submitted.

Are intangible assets included?

Intangible assets are usually excluded from the VAT deregistration assets calculation.

This means items such as goodwill, patents and copyrights are not normally included when calculating whether VAT is due on stock and assets at deregistration.

However, businesses should still review the wider transaction carefully. For example, if a business is being sold, reorganised or transferred, the VAT treatment may depend on whether the transfer qualifies as a going concern.

How does the £1,000 VAT test work?

VAT is not due on retained stock and assets if the total VAT due would be £1,000 or less.

The important point is that the test is based on the VAT due, not simply the value of the assets. Older explanations often refer to a £6,000 figure. That shorthand only works where all the assets are standard-rated at 20% and the value being considered is VAT-inclusive.

For example, if all relevant assets are standard-rated at 20%, a VAT-inclusive value of £6,000 produces VAT of £1,000. If the assets are worth more than that, or if the VAT calculation produces more than £1,000, VAT must be accounted for on all relevant assets, not just the excess.

HMRC’s cancellation guidance confirms that where the total VAT on assets to be included is £1,000 or less, no VAT is due. Where it exceeds £1,000, the VAT must be accounted for on the final VAT return.

How should stock and assets be valued?

Assets must usually be valued at their current market value at the VAT deregistration date.

This means the business should not simply use the original purchase cost. A van, computer, machine or item of stock may have changed in value since it was bought. The calculation should reflect what the asset is worth at the time VAT registration ends.

Businesses should retain evidence to support the valuation. This may include:

• Stock records
• Asset registers
• Resale values
• Supplier or dealer valuations
• Depreciation schedules
• Photographs
• Comparable sale prices
• Notes explaining the valuation method used

HMRC requires evidence where a business has calculated that no VAT is due or that the £1,000 VAT test has not been exceeded.

Worked example 1: assets below the £1,000 VAT test

A VAT-registered business cancels its VAT registration and still owns office equipment with a current market value of £3,000 plus VAT.

The assets are standard-rated. VAT at 20% would be £600.

Because the total VAT due is £1,000 or less, the business does not need to account for VAT on those assets on its final VAT return.

Worked example 2: assets above the £1,000 VAT test

A business deregisters for VAT and still holds standard-rated stock and equipment with a current market value of £8,000 plus VAT.

VAT at 20% would be £1,600.

Because the total VAT due is more than £1,000, the business must account for VAT on the assets. The output VAT is included on the final VAT return.

This can create a cash flow issue if the business has not planned for the charge before cancelling VAT registration.

Worked example 3: mixed assets

A business holds several assets when it deregisters:

• Standard-rated stock with a market value of £4,000 plus VAT
• Office equipment with a market value of £1,500 plus VAT
• Goodwill with an estimated value of £10,000

The goodwill is an intangible asset and is not included in the stock and assets calculation.

The standard-rated stock and office equipment have a combined value of £5,500 plus VAT. VAT at 20% would be £1,100.

Because the VAT due exceeds £1,000, the business must account for VAT on the relevant stock and equipment on its final VAT return.

What about land and buildings?

Land and buildings require particular care.

An interest in land or buildings may need to be included where it would be taxable if sold, such as where an option to tax has been made. HMRC’s guidance on options to tax when cancelling VAT registration explains that an option to tax can affect final tax liability when a business cancels its VAT registration.

This area should be reviewed before applying to cancel VAT registration, particularly where the business owns commercial property, has opted to tax land or buildings, or has previously recovered input VAT on property costs.

What about Capital Goods Scheme assets?

Some assets may also need to be reviewed under the Capital Goods Scheme.

The Capital Goods Scheme can apply to certain high-value capital items, including land, buildings, civil engineering works, computers, aircraft, ships and boats, depending on the value and circumstances. Where it applies, deregistration may trigger a final adjustment.

This is separate from the general stock and assets calculation. A business may therefore need to consider both the deemed supply rules and any Capital Goods Scheme adjustment before submitting its final VAT return.

What if the business is sold as a going concern?

Different rules may apply where a business is sold or transferred as a going concern.

If assets were acquired VAT-free as part of a transfer of a going concern, HMRC’s VAT Notice 700/11 states that VAT may still need to be accounted for when the business later deregisters, depending on the circumstances.

Where a business is being sold, reorganised or transferred before VAT deregistration, professional advice is highly recommended. The VAT treatment can depend on the legal entity, the business structure, whether the buyer will be VAT registered and whether the transfer qualifies as a going concern.

How is VAT on assets reported?

Any VAT due on stock and assets is included on the final VAT return.

HMRC’s cancel your VAT registration guidance confirms that businesses must submit a final VAT return for the period up to and including the cancellation date. The final return should include any VAT due on stock and other assets held at that date.

After deregistration, the business must stop charging VAT, remove its VAT registration number from VAT invoices, and keep VAT records for six years.

The VAT People can help businesses review VAT returns before submission to reduce the risk of underdeclared output tax or incorrect final VAT treatment.

What are the risks of getting VAT deregistration assets wrong?

VAT deregistration can create risks where stock and assets are not reviewed properly.

Common issues include:

• Using original purchase cost instead of current market value
• Overlooking unsold stock
• Failing to include equipment where input VAT was reclaimed
• Misunderstanding the £1,000 VAT test
• Treating the old £6,000 shorthand as a fixed rule
• Ignoring opted land or buildings
• Missing Capital Goods Scheme adjustments
• Failing to keep valuation evidence
• Submitting a final VAT return without reviewing asset values

These errors can lead to VAT owed to HMRC, assessments, interest and potential penalties. If HMRC has raised a query or issued an assessment, The VAT People can support businesses with HMRC assessment reviews.

How The VAT People can help

The VAT People advises businesses on VAT deregistration, final VAT return calculations and the VAT treatment of stock and assets.

Our support can include:

• checking whether a business can deregister for VAT
• reviewing stock and assets held at the deregistration date
• calculating whether the £1,000 VAT test is exceeded
• reviewing current market value evidence
• considering land, buildings and option to tax issues
• checking Capital Goods Scheme adjustments
• reviewing final VAT return entries
• advising on HMRC queries, assessments and disputes

With more than 30 years of experience, The VAT People helps businesses manage VAT deregistration accurately and avoid unexpected VAT liabilities.