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Andrew Needham, Director of VAT Solutions (UK) Ltd, highlights a potential problem for certain VAT registered businesses.

Difficult position

If a business is partly exempt and deregisters for VAT, it will, unfortunately, find itself in a difficult position.

On deregistering, a business has to account for VAT on some or all of its business assets and stock on hand.  However, it will not have to account for any VAT if the total VAT due on the assets would be £1,000 or less.

Exclusions

It should exclude items on which it could not reclaim VAT when it bought them. 

Such items may be any of the following:

• goods bought from unregistered businesses;
  
• cars (except private taxis, self-drive hire cars and driving school cars on which input tax has been claimed);
  
• goods bought under the second-hand goods scheme;
  
• goods used wholly for business entertainment;
  
• goods which have been directly attributed to an exempt business activity (unless some input tax relating to these goods was reclaimable through the partial exemption rules);
  
• land or buildings which were obtained VAT-free even though you may be using them to make standard-rated supplies (such as holiday accommodation or because you have opted to tax the property);
  
• goods not bought for business purposes; or
  
• goods bought before VAT was introduced on 1 April 1973, which were not relieved of Purchase Tax or Revenue Duty.

In the example of a flying club (which  we have acted for in the past), if it had been unable to recover any VAT on its gliders because they were only used for exempt purposes, it would not need to account for any VAT on them at the time of deregistration.  However, if it had included them as non-attributable (‘residual’) assets because there was both taxable and exempt use of them, then it would have to account for VAT on them based on the full market value of them at the time of deregistration. 

Unfair treatment

This is clearly not very fair on partly exempt businesses, but unfortunately, the rules as they stand on this are quite clear.