Insolvency: VAT deregistration – it’s not just about form filling

News

9 Apr

It is important that IPs and colleagues working on insolvency cases fully consider the consequences of VAT deregistration before submitting a VAT 7 application form to HMRC.

"It is important not to deregister too soon when you have assets to realise."

In this article, VITA’s insolvency VAT specialist Tony Cochrane shares insights on some points that IPs, caseworkers, and others involved in insolvency cases should consider before applying to deregister a business’ VAT account.

This could result in higher VAT recovery, help you avoid unnecessary significant VAT costs, reduce VAT administration, and improve creditor returns.

This article considers:

How to deregister from VAT
When to deregister from VAT; & when not to – the approach has evolved
Timing is important when you have assets to realise – for IPs and buyers
Deemed supplies – a VAT risk you definitely need to know about and manage
When the business deregisters can impact VAT recovery
How to recover VAT – VAT returns vs VAT 426 forms
So, when do I deregister? Spoiler: it depends . . .

Cancelling a VAT registration – the easy bit

Form VAT 7 should be submitted to HMRC to cancel a VAT registration. It is a straightforward process once you decide to deregister.

HMRC recently published “Insolvency practitioner bulletin 1 (2025)” to publicise updates to the VAT 7 deregistration form. Click here for VITA’s news article on the update.

Whilst the process is straightforward and HMRC’s update is helpful, there is a lot for IPs to consider before pressing the button.

Don’t jump in too quickly – things have developed over the years

Thought should go into the timing of deregistering from VAT. There are factors that require or would benefit from keeping the VAT registration open.

Over the years there have been changes in how HMRC and IPs approach VAT deregistration.

Historically some HMRC staff would automatically process the VAT deregistration on receipt of the VAT 769 notification form or other IP correspondence.

This evolved to HMRC keeping VAT registrations open until the IP submitted a deregistration application. Sometimes HMRC would ask IPs what their thoughts were.

IPs would still request deregistration early in their appointment. Even when HMRC publicised when the VAT registration should remain open.

Prematurely cancelling the VAT registration creates practical issues when realising assets and recovering VAT. Keeping the VAT registration open too long can be sluggish and may not benefit anyone.

Varied factors and milestones can paint a picture on what works best for each case.

Realising assets – does VAT deregistration matter to buyers and the case?

It is important not to deregister too soon when you have assets to realise.

A deregistered business cannot issue a valid VAT invoice when realising assets. This means the buyers cannot have a legal basis to claim the VAT incurred on the assets they purchased.

Irrespective of HMRC or IPs preferences, the VAT legislation and HMRC guidance requires a VAT registration to be maintained or sought if taxable supplies are or will be made above the relevant thresholds.

Currently businesses must register for VAT if their taxable turnover exceeds £90,000. Businesses can deregister from VAT once their taxable turnover is below £88,000 but should remain registered if they expect to have taxable sales. Such as selling a taxable property.

As such, VAT registration must be preserved where assets to be realised are liable to taxable rates of VAT. Typical examples of this include trading stock or land & property the business or IP has Opted to Tax. When such assets are realised output tax is typically due to HMRC.

Further, there is a lot of admin time attached to cancelling a VAT registration then having an obligation to re-register.

Case study 1: remain VAT registered

An IP has retained the VAT registration that was in place pre-appointment. As the IP intends to sell a property the business has on its balance sheet and had Opted to Tax.

The IP realises the property asset for £1m net, and accounts for account for £200k of output tax to HMRC on the business’ VAT return and deducts the input tax on associated expenditure. The IP issues a VAT invoice to the buyer, who can recover the £200k of input tax if it is VAT registered and will use the property for a fully taxable purpose.

This is all relatively straightforward for VAT reporting purposes.

Case study 2: deregistered

Conversely, the VAT position is complex and burdensome where the business or IP has deregistered in advance of the property sale.

The IP would have an obligation to:

Re-register the business for VAT
Account for the output tax to HMRC
Issue a valid VAT invoice to the buyer once the new VAT number is in place
Issue pro-forma invoice or payment request if a VAT number is not available
Submit at least one normal VAT return to HMRC
Apply for deregistration, again
Submit another final VAT return to HMRC

From the case studies it pays to remain VAT registered. There is less admin involved for all parties, especially the IP.

Deemed supplies – an unexpected sting in the tail

HMRC’s approach to deemed supplies is another important consideration when IPs think about VAT deregistration. Not considering or trying to identify deemed supply issues can cause panic, or worse, also result in a significant unexpected financial cost.

This is a challenge as HMRC will expect IPs to make a deemed supply VAT payment where the IP cancels a business’ VAT registration and there are still assets to realise.

This means that output tax is payable to HMRC; even though the IP has not yet realised the assets, and, in turn, no income has been received for the asset, never mind VAT collected.

This applies to stock and trading assets, including land and property still on hand at the VAT deregistration date if certain boxes are ticked. A practical issue is HMRC has a dedicated team that follows up on VAT deregistration cases where the business had Opted to Tax land or property. Resulting in alarming HMRC letters arriving weeks or months after the VAT deregistration application was submitted and finalised.

It is important that IPs and caseworkers keep this rule in mind, as the monetary impact could be significant, particularly where high values of stock remain in hand, or a single high value property remains on the balance sheet.

For example, if you deregister the business when it still has a £6m property on the books there could be an exposure of £1m.

In such situations it is sensible to delay VAT deregistration until the stock and assets are sold. This will delay the VAT accounting until you have been paid. And removes the requirement to re-register to account for VAT on the asset realisation.

Helpfully there is a de minimis and no requirement to make a deemed supply payment where insignificant stock and assets remain in hand. If the value of output tax deemed payable to HMRC does not exceed £1,000, no VAT is payable to HMRC.

In these circumstances you may elect to deregister knowing you do not have a deemed supply charge, or a minimal charge. This may be appealing if you are eager to close the VAT registration and the case.

In experience the real danger typically lies where land and property that remains on the books. Though obtaining VAT specialist support can verify and quantify any risk – as deemed supply VAT is not always due to HMRC – even in situations where an Option to Tax has been exercised.

What about VAT recovery?

VAT deregistration timing is also important from a VAT recovery perspective.

In principle, IPs are entitled to deduct input tax, including the VAT on office holder costs. Where a business was fully taxable while trading, the IP can potentially benefit from full VAT recovery.

That said, VAT recovery will not be available in some situations. Representing an additional 20% cost or claim restrictions. Partial exemption calculations might need to be factored in, but that is a VAT joy to consider separately.

VAT recovery will not be possible if the business was not VAT registered, and there will be no taxable income to drive future VAT registration opportunities.

The crucial point to note is the doors to VAT recovery may be open, but not if unwittingly closed due to premature deregistration. Some practical examples might be useful.

Pre-appointment VAT deregistration

If the business was VAT registered, but the registration was cancelled pre-appointment, the door could be closed to VAT recovery. This may add significant unexpected costs to a case. But it depends on the exact circumstances.

If the VAT number was cancelled shortly before appointment, HMRC are more likely to entertain crediting input tax claims that the IP submits on form VAT 426. Though this should not be taken as a given.

Conversely, HMRC is certainly less likely to repay a VAT claim if the business deregistered much earlier due to reduced taxable turnover and satisfying the VAT deregistration threshold tests as the business traded.

The safest bet, where possible, is keeping the VAT registration open until post-appointment to facilitate at least partial VAT recovery.

VAT returns vs VAT 426 claims

Whilst the business is VAT registered, VAT claims can be submitted to HMRC on VAT returns. As noted above, post-deregistration VAT claims can be submitted to HMRC on form VAT 426. Both routes have the same effect. IPs submit the VAT claim, HMRC repays the claim if satisfied it is valid.

However, in practice there can be benefits to VAT return claims, such as HMRC processing them quicker than VAT 426 claims, and VAT legislation capturing protocol around HMRC aiming to process the claims within certain time limits.

Though IPs and colleagues managing cases may consider that the workload associated with periodic VAT returns and general compliance outweighs such a benefit and the effort that goes into ad hoc VAT 426 claims.

So, when should I deregister?

As with most VAT matters, it depends . . .

It really is something that should be considered on a case-by-case basis.

There is a lot for IPs, caseworkers and others involved in cases to consider from a VAT perspective, and the above points highlight that VAT deregistration timing should be afforded careful consideration. Particularly given the potential benefits and equally the pitfalls that may be encountered.

The key take away is to consider the timing of deregistering before submitting the VAT 7 form to HMRC. Our VAT advisors have experience assisting IPs and caseworkers with selecting the best time to deregister. Even introducing VAT deregistration checklists into the processes and controls to minimise the risk of deregistering at a point where issues may be triggered and opportunities lost.

It could be worth discussing steps that can be put in place for insolvency teams to self-manage the decision-making process, or consulting with an insolvency VAT expert to optimise the VAT deregistration process generally and acutely.

Tony Cochrane

M: 07923 175 351

Email: tony@vita-uk.com