Q- As a jobbing builder, my client has reduced the number of projects he takes on as he approaches retirement, and as a result, his turnover has fallen below the VAT threshold and he wishes to deregister. However, he receives rental income from a small mixed property portfolio, some of which he opted to tax some years ago. What will happen if he deregisters?
A- You are thinking of the rules around deemed supplies of assets on hand at deregistration. VAT Act 1994, schedule 4, paragraph 8 deems a supply of goods to take place when a person ceases to be a taxable person if he has goods on hand which form part of the business assets, and on which input tax has been allowed. Output tax is due on the value of any stock and assets owned by the business at the time of deregistration unless the VAT on the deemed supply would not exceed £1,000.
In the case of land and commercial property, whether output tax is due on deregistration depends on whether input tax was recoverable on the purchase and whether the property is opted to tax. The combination of facts relating to the purchase and subsequent expenditure will affect any advice and we can help with this as consultancy if required but I can give a general idea with some simple examples.
If an option to tax was made by your client more than 20 years ago, it is possible to revoke it. Notice 742A explains how to do this in section 8. If the conditions set out in section 8.3 are met, your client could revoke his option to tax prior to deregistration, and therefore any deemed supply would be exempt and no output tax would be due.
However, where revocation is not possible if the property was bought with VAT, and an option to tax was made to enable input tax to be recovered, output tax will be due on deregistration. As output tax would be due on the current value of the property at the time of deregistration, we would advise careful consideration of all relevant factors before deregistering.
If your client has opted to tax a property (for example to enable him to recover input tax on repairs or a refurbishment), but the property itself was bought exempt, then although output tax will have been charged on rents and input tax claimed on costs, there is no output tax liability on deregistration. This is because no input tax was recovered on the purchase.
In addition to the output tax liability that can arise on deregistration, an exempt deemed supply could trigger an adjustment if the property is within the capital goods scheme (CGS).
This could be the case if within the ten years prior to deregistration your client has spent £250,000 + VAT or more on the purchase, alteration or refurbishment of a property so this should be checked and ruled out prior to progressing with the deregistration.
As a final point, if your client does deregister, his option to tax remains effective for 20 years once made. He will still need to include his taxable rents as the turnover when monitoring any future liability to re-register for VAT, and if he later sells an opted property, the business may need to re-register and account for VAT on the sale proceeds.