If the taxable turnover of a business falls below the de-registration threshold, currently £79,000 per annum, then it can de-register from VAT and no longer needs to account for VAT on its sales. However, on the downside you have to account for VAT on a deemed supply of assets on hand at de-registration if the VAT comes to more than £1,000.
But how does this requirement affect a business that owns a property?
Owning a property
If a business de-registers from VAT and owns a property on which it recovered the VAT, and its sale would be a taxable supply, the business will be considered to be making a deemed supply of the property and will need to account for VAT on it at the open market value. This could lead to a huge and unexpected bill from HMRC!
This means that if you have a property that is less than three years old (which is a standard rated supply in its own right), or you have opted to tax it, you will need to account for VAT on its open market value when you de-register.
On the plus side, if the commercial property is more than three years old and you have not opted to tax it, the supply would be exempt and so no VAT is due on the deemed supply of the property on de-registration.
However, if the property cost more than £250,000 and you recovered the VAT on its purchase it is covered by the capital goods scheme, so if you de-register for VAT within ten years of its purchase you will need to repay a proportion of the VAT reclaimed, rather than account for VAT on its current market value.
Have you opted to tax the property?
If you have opted to tax a commercial property (normally done if you are a property rental business) and had not recovered VAT on its purchase then no VAT is due on de-registration. This could happen to a property rental business that was not charged VAT on the original purchase but later opted to tax after a major refurbishment in order to recover the VAT on the refurbishment work.
There is one major problem when de-registering for VAT in this scenario that businesses have to be aware of. When you de-register for VAT the option to tax does not go away; HMRC guidance says that it is still in place for 20 years from the date it was first made. The effect is that if you sell the property after de-registering for VAT, but within the 20 years of opting to tax it, you would need to re-register for VAT and account for VAT on the sale. If you forget to do this, there are the customary penalties and interest!
Transfer of a going concern
If you have acquired a commercial property as part of a transfer of a going concern (TOGC) and had to opt to tax it in order to obtain TOGC status, you will still have to account for VAT on de-registration, even though you did not claim back any VAT when you acquired it. This is because the only reason you did not claim back any VAT at the time was because none was charged as part of the TOGC treatment.
Practical Tip:
If your business owns a property and you are considering de-registering from VAT, be aware of the potential pitfalls, and make sure your are aware of the potential costs and how to avoid them.
