VAT Deregistration Threshold: When and How Can You Leave the VAT System?

A complete guide for Limited Companies and self-employed businesses in the UK: the £88,000 threshold, HMRC conditions, the deregistration application, the final VAT Return, stock, assets and the risk of having to register again

VAT registration is not always permanent.

A business that previously exceeded the registration threshold may lose an important contract, reduce its activity, close a division or end up serving fewer customers. In other situations, the owner may close the business completely, transfer the activity to a Limited Company or sell the business to another person.

In all these cases, the same question arises:

Can I leave the VAT system?

The answer does not depend only on turnover during the previous 12 months.

For voluntary deregistration, HMRC mainly considers what you expect your taxable turnover to be during the next 12 months, the reasons for the reduction and whether the estimate is realistic. Stock, equipment, commercial vehicles, properties subject to an option to tax, the final VAT Return and the exact date from which you must stop charging VAT must also be reviewed.

Deregistering without carrying out these checks can produce an unexpected VAT bill at the very moment when the owner believed the business was becoming simpler.

The Verdict at the Beginning

At the date of this article:

ThresholdAmount

Compulsory VAT registration threshold £90,000

Voluntary VAT deregistration threshold £88,000

A business established in the UK may apply for deregistration if it can demonstrate that its estimated taxable turnover for the next 12 months will not exceed £88,000.

Falling below the threshold does not automatically cancel the registration. The business may remain voluntarily registered or may ask HMRC to remove it from the VAT register. The deregistration threshold is intentionally lower than the registration threshold so that businesses do not repeatedly leave and re-enter the system because of small fluctuations in income. (GOV.UK)

Deregistration becomes compulsory where, for example:

the business stops making taxable supplies;
the owner no longer intends to carry on the activity;
the business is sold;
the legal structure changes;
the company joins a VAT group;
the activity closes completely.

In these situations, HMRC must normally be notified within 30 days. (GOV.UK)

The £88,000 Threshold Is Not Tested in the Same Way as the Registration Threshold

This is one of the most important distinctions.

For compulsory registration, a business must monitor its taxable turnover over a rolling 12-month period and register if it exceeds £90,000. There is also a separate test where the business expects to exceed £90,000 during the next 30 days alone. (GOV.UK)

For deregistration, the main test is forward-looking:

What will the taxable turnover be during the next 12 months?

It is not enough to show that turnover during the previous 12 months was £85,000 or £87,000.

HMRC may ask for an explanation and evidence showing why future income will remain below £88,000. Examples mentioned by HMRC include reduced working hours, the loss of contracts or a change in the way the business operates. (GOV.UK)

What Does “Taxable Turnover” Mean?

Taxable turnover does not automatically mean every amount paid into the business bank account.

It generally includes the VAT-exclusive value of supplies that are:

standard-rated;
reduced-rated;
zero-rated.

It may also include certain sales of assets, goods used privately, barter transactions and some transactions subject to the reverse charge.

Income from activities that are completely VAT-exempt is not normally included in taxable turnover. Zero-rated is not the same as exempt: zero-rated sales still count towards the threshold. (GOV.UK)

Example

A business expects the following during the next 12 months:

£60,000 of standard-rated services;
£18,000 of zero-rated sales;
£15,000 of VAT-exempt income.

The estimated taxable turnover is:

£60,000 + £18,000 = £78,000

The £15,000 of exempt income does not enter the normal threshold calculation.

The business may therefore have total income of £93,000 while still having taxable turnover below £88,000.

However, the classification must be correct. An activity informally described as “exempt” may in reality be zero-rated or standard-rated.

Receiving Less Than £88,000 Does Not Automatically Mean HMRC Will Approve the Application

For deregistration based on a reduction in turnover, HMRC must be satisfied that the estimate is realistic.

A strong forecast should be based on:

active contracts;
recurring income;
orders already accepted;
seasonal activity;
customers lost or gained;
changes in working hours or capacity;
the prices that will apply after deregistration.

For businesses registered for less than 12 months, HMRC may annualise the available figures to estimate the turnover for a full year. (GOV.UK)

A simple statement that “I do not think I will exceed the threshold again” may be insufficient where:

recent sales are close to £88,000;
existing contracts may push the business above the threshold;
the reduction is only temporary;
prices will not be reduced after VAT is removed;
the business has grown during recent months.

The Pricing Problem: A Calculation Many Businesses Get Wrong

HMRC requires the deregistration estimate to be considered excluding VAT.

However, after deregistration, the entire amount charged to the customer becomes business turnover because there is no longer a VAT element collected for HMRC.

This can completely change the result.

Example: £96,000 Invoiced Including VAT

A business currently invoices:

£96,000 including VAT

At the 20% rate, this consists of:

net income: £80,000;
output VAT: £16,000.

The owner sees £80,000 of taxable turnover excluding VAT and assumes the business is below the £88,000 deregistration threshold.

However, after deregistration there are two possible outcomes.

Option 1: Prices Are Reduced

If prices are reduced by the VAT element, customers will pay approximately £80,000 in total.

The projection remains below £88,000 and may support the application.

Option 2: The Same Final Prices Are Maintained

If the business continues to receive £96,000 but no longer charges VAT, the entire £96,000 becomes turnover.

The business would exceed the deregistration threshold and could quickly become liable to register again.

HMRC may refuse the application if it is not satisfied that the business will stop adding VAT or, in the case of a retailer, that prices will be reduced by the VAT element. (GOV.UK)

DCTaxAgent Insight

The threshold must be tested using the actual prices that will be charged after deregistration, not only the net figures shown on previous VAT Returns.

Voluntary Deregistration and Compulsory Deregistration Are Two Different Processes

Voluntary Deregistration

This applies where the business continues to make taxable supplies but can demonstrate that their value during the next 12 months will not exceed £88,000.

The business is not required to leave the VAT system.

It may remain voluntarily registered, continue charging VAT and recover input VAT under the normal rules. (GOV.UK)

Compulsory Deregistration

This must be requested where the business:

stops making taxable supplies;
no longer intends to make such supplies;
is sold;
changes its legal structure;
joins a VAT group;
ceases to exist in its current form.

In these circumstances, the effective date of cancellation may be the date on which the activity or the intention to make taxable supplies ended. (GOV.UK)

Where turnover falls because you intend to suspend or stop trading for a significant period, the position should be considered as a possible compulsory deregistration rather than being presented artificially as a normal reduction in turnover.

HMRC states that it will not approve a voluntary application based on a reduction caused only by an intention to stop or suspend taxable supplies for at least 30 days. (GOV.UK)

Should You Leave the VAT System Simply Because You Can?

Not necessarily.

Deregistration is a commercial decision, not only an administrative one.

Situations Where It May Be Beneficial

For a business that mainly sells to private individuals, removing VAT may allow the business to reduce the final price or retain a higher margin.

For example, for a service charged at £120:

while registered, £20 may represent output VAT;
after deregistration, the business may charge £100 to become more competitive;
alternatively, it may keep a higher price where the market allows, provided the projected turnover remains below the threshold.

Deregistration may also reduce the administrative work connected with VAT Returns and digital VAT records.

Situations Where Remaining Registered May Be Better

Where most customers are VAT-registered businesses, they can normally recover the VAT charged, so removing VAT may not provide them with a significant advantage.

Remaining registered may be preferable where the business:

has substantial VAT-bearing expenses;
plans to buy equipment;
pays VAT-registered subcontractors and suppliers;
mainly makes zero-rated supplies and receives repayments;
expects to exceed £90,000 again within a short period.

A VAT-registered business must report output VAT, but it may treat eligible VAT on purchases as input tax. After deregistration, VAT on future purchases can no longer normally be recovered. (GOV.UK)

How to Apply for VAT Deregistration

The application can be made:

online through the VAT online account;
by an authorised agent;
by submitting form VAT7 to HMRC.

Even where an agent submits the application, the business owner remains responsible for the accuracy of the information provided. (GOV.UK)

What Should Be Prepared Before Applying?

It is advisable to maintain a clear file containing:

actual turnover for the previous 12 months;
the forecast for the next 12 months;
the explanation for the reduction;
contracts lost or amended;
new working hours or reduced capacity;
the pricing policy after deregistration;
a list of stock and assets;
details of any property subject to an option to tax;
the requested cancellation date.

HMRC may refuse the application if it is not satisfied that future turnover will remain below the applicable limit.

From What Date Does Deregistration Apply?

For voluntary deregistration, the effective date may be:

the date on which HMRC receives the application;
a later date agreed with HMRC.

A voluntary application cannot normally be backdated.

Until HMRC confirms the cancellation, the business must continue charging, reporting and paying VAT as normal. (GOV.UK)

For compulsory deregistration, the date may be the date on which the business actually stopped making or intending to make taxable supplies. (GOV.UK)

HMRC will issue official confirmation through the VAT account or by post. Processing normally takes up to approximately 40 working days, although it may take longer during busy periods. (GOV.UK)

Do not remove VAT from invoices simply because the application has been submitted. Wait for the official effective date confirmed by HMRC.

What Happens to Business Stock and Assets?

This is the area that most commonly produces unexpected costs.

At the deregistration date, HMRC may treat the business as making a deemed supply of the goods and assets it retains.

This may include:

unsold stock;
machinery;
equipment;
furniture;
computers;
commercial vehicles;
certain interests in land or buildings.

The rules generally consider assets where the business recovered, or was entitled to recover, input VAT on acquisition. Intangible assets such as goodwill, patents and copyright are not included in this rule. (GOV.UK)

The £1,000 VAT Limit

VAT does not have to be reported on assets where the total VAT calculated on the relevant assets is £1,000 or less.

If all assets are standard-rated at 20%, this means no payment arises where their total current value, including VAT, is no more than £6,000.

Where the value exceeds £6,000, VAT must be calculated on all relevant assets, not only on the amount above £6,000. (GOV.UK)

Example

A company retains the following after deregistration:

a commercial van;
equipment;
unsold stock.

Their current market value, including VAT, is £7,200.

The VAT included is:

£7,200 ÷ 6 = £1,200

Because the VAT exceeds £1,000, the company must include £1,200 in its final VAT Return, assuming the assets are relevant and input VAT was recovered.

If the total value had been £6,000, the VAT would have been exactly £1,000 and would not have been payable under the de minimis limit.

The Value Used Is Not Necessarily the Original Cost

Assets are normally valued at their current market value in their existing condition at the deregistration date.

A laptop purchased for £2,000 three years earlier may now have a much lower value. Similarly, a vehicle or piece of machinery should normally be valued using a realistic resale value rather than historical cost. (GOV.UK)

Which Assets May Be Excluded?

VAT does not normally have to be reported on goods where no input VAT was recovered.

Official examples include:

goods bought from private individuals or non-registered businesses;
most cars where input VAT was not deductible;
goods purchased under a VAT margin scheme;
goods used entirely for business entertainment;
certain goods connected with exempt activities;
assets not purchased for business purposes. (GOV.UK)

However, where an asset was acquired without VAT as part of a Transfer of a Going Concern, there may still be an obligation to account for VAT on deregistration. (GOV.UK)

Properties and the “Option to Tax”

Where the business owns commercial property subject to an option to tax, deregistration must be considered carefully.

The option to tax does not automatically disappear when the VAT registration number is cancelled.

Income from that property may continue to count when considering taxable turnover, and where the property is retained and input VAT was recovered on acquisition, a deemed supply may arise based on its current market value. (GOV.UK)

Following updates introduced in 2026, HMRC has a separate process through which details of properties subject to an option to tax must be provided before deregistration is finalised.

The information may include the address, title number, acquisition date, former owner, the date and value of any sale and the buyer’s details. (GOV.UK)

DCTaxAgent Insight

A company that owns commercial property should not apply for deregistration before checking the option to tax and the Capital Goods Scheme.

For assets still within the Capital Goods Scheme adjustment period, a final adjustment may also be required in the last VAT Return. (GOV.UK)

What Happens if You Change From Sole Trader to Limited Company?

Changing legal structure is not only a change of name.

A sole trader and a Limited Company are separate legal persons for VAT purposes.

There are two main options.

Keeping the VAT Number

It may be possible to request the transfer of the VAT registration number to the new entity, normally using form VAT68 together with the registration procedure for the new entity.

Not Keeping the VAT Number

The old entity applies for deregistration, and the new company submits a separate VAT registration application where it is required or wishes to register voluntarily.

An option to tax over a property does not automatically transfer to the new entity even where the VAT number is retained. The new entity must consider and make its own election under the applicable procedure. (GOV.UK)

An incorrect transfer can lead to:

invoices issued under the old entity’s VAT number;
input VAT claimed by the wrong person;
a lack of continuity in VAT Returns;
problems with the transfer of assets;
unexpected VAT liabilities on stock.

What Must Be Included in the Final VAT Return?

After deregistration is confirmed, the business must submit a final VAT Return for the period ending on the cancellation date.

The period may be shorter than a normal quarter and, in some cases, may be only one day.

The final return must include:

outstanding output VAT;
eligible input VAT;
outstanding adjustments;
VAT on relevant stock and assets;
any partial exemption adjustments;
Capital Goods Scheme adjustments;
transactions under Cash Accounting or other applicable schemes.

Even where there is no VAT to pay, the final return must be submitted as a nil return if HMRC requires it. (GOV.UK)

The final return should not be delayed simply because some supplier invoices are missing. There may be a separate procedure for recovering VAT on invoices received after deregistration. (GOV.UK)

Invoices After the Deregistration Date

From the official cancellation date, the business must no longer:

add VAT to new supplies;
issue VAT invoices;
use the VAT registration number on invoices;
allow customers operating self-billing arrangements to continue adding VAT.

Customers and platforms that issue invoices on the business’s behalf must be informed immediately.

Issuing an invoice showing VAT after deregistration can create tax liabilities and penalties. (GOV.UK)

Invoices relating to supplies made before deregistration must be considered according to the tax point and the period in which the transaction occurred. The invoice date is not always the only relevant factor.

Can VAT Be Recovered After Deregistration?

Yes, in certain circumstances.

Input VAT relating to goods or services received while the business was registered may be recoverable where:

the VAT has not already been claimed;
supporting documents are available;
the claim is within the relevant time limit;
the same restrictions that applied before deregistration are satisfied.

Under certain conditions, VAT may also be recovered on services received after deregistration where they are directly connected with the former taxable activity, such as certain accountancy or legal services relating to closing the business.

The general time limit mentioned by HMRC is four years. (GOV.UK)

Bad debt relief identified after deregistration may also be claimed where the VAT was originally declared and the scheme conditions are satisfied. (GOV.UK)

It is important for a Limited Company to complete all claims and repayments before it is dissolved. After striking off, the company ceases to exist and HMRC may be unable to make the repayment. (GOV.UK)

What Records Must Be Kept?

HMRC’s deregistration confirmation becomes part of the VAT records.

The business must normally retain VAT documents for six years. A list of all assets held at the deregistration date, together with the value of each asset, must also be retained even where no VAT became payable. (GOV.UK)

The file should include at least:

the deregistration confirmation;
the final VAT Return;
the turnover calculation;
the 12-month forecast;
evidence supporting the loss of contracts;
the asset calculation;
valuations used;
purchase invoices;
option-to-tax documents;
correspondence with HMRC.

What Happens if You Exceed the Threshold Again?

Deregistration does not provide a protected period.

After leaving the system, the business must continue monitoring taxable turnover over a rolling 12-month period.

If it exceeds the £90,000 registration threshold or expects to exceed it during the next 30 days, a new registration obligation may arise. (GOV.UK)

HMRC may re-register a business where it discovers that deregistration should not have been approved. In that case, the business may have to account for VAT for the intervening period even where it did not separately collect VAT from customers. (GOV.UK)

Example

A business is deregistered on 1 October.

By March, activity has increased significantly and the rolling 12-month taxable turnover reaches £92,000.

It is not enough to say:

“HMRC approved my deregistration last year.”

A new registration obligation must be considered under the normal rules.

Do Not Artificially Split the Business to Fall Below the Threshold

Some owners attempt to divide activity between:

two companies;
a husband and wife;
a sole trader and a Limited Company;
two brands;
two bank accounts;
different working days.

A genuine commercial separation may be lawful.

However, where the activities remain commercially, financially and organisationally connected and the main purpose is VAT avoidance, HMRC may consider there to be artificial separation or disaggregation.

HMRC may refuse deregistration and issue a direction treating the separate entities as one business for VAT purposes. (GOV.UK)

Using separate invoice numbers or separate bank accounts does not by itself prove that there are two independent businesses.

The Special Case of Businesses Making Zero-Rated Sales

A business may have taxable turnover above £88,000 and still apply, in certain circumstances, for exemption from registration or cancellation where its supplies are wholly or mainly zero-rated.

Where there are also standard-rated supplies, HMRC considers whether input tax normally exceeds output tax.

This is not automatic deregistration. The application must be made separately to the VAT Registration Service and supported by calculations. (GOV.UK)

For a business that regularly receives VAT repayments, remaining registered may be more beneficial than deregistering.

Non-Established Taxable Persons

The £88,000 threshold is not available to a person or business classified as a Non-Established Taxable Person — NETP.

A NETP making taxable supplies in the UK must, in principle, be VAT-registered regardless of the value of its sales.

It may normally apply for deregistration only where it stops making taxable supplies in the UK completely. (GOV.UK)

This rule is relevant to businesses operated from outside the UK that sell taxable goods or services in the UK.

Four Practical Examples

1. A Contractor Who Loses a Major Contract

A contractor records £102,000 of taxable turnover during the previous 12 months.

The main contract, worth £35,000 per year, has ended and will not be replaced. The remaining contracts and confirmed orders indicate turnover of £67,000 during the next 12 months.

The contractor may apply for deregistration and provide:

the contract termination notice;
a monthly forecast;
a list of confirmed work;
the pricing policy after deregistration.

The fact that the past shows £102,000 does not automatically prevent deregistration because the voluntary test looks at the next 12 months.

2. A Salon That Keeps the Same Prices

A salon receives £90,000 including VAT, equivalent to £75,000 excluding VAT.

The owner intends to keep all prices unchanged after deregistration.

The new turnover would be £90,000 because the amount would no longer include VAT.

The projection exceeds £88,000, and the simple £75,000 calculation from previous VAT Returns does not support the application.

3. A Company With Valuable Equipment

The company estimates turnover of only £60,000 and may qualify to leave the VAT system.

However, it retains machinery with a current market value of £18,000 including VAT, on which input VAT was recovered.

The potential VAT is £3,000.

This amount may have to be included in the final VAT Return, reducing the immediate financial benefit of deregistration.

4. A Sole Trader Transferring the Business to a Limited Company

The sole trader should not submit an ordinary deregistration application and then continue using the same VAT number through the company.

A decision must be made on whether:

the VAT number will be transferred;
the company will receive a new number;
the transfer of assets is a Transfer of a Going Concern;
VAT arises on stock or equipment;
the new company is required to register.

What Should Be Checked Before Submitting the Application?

Before deregistration, the most important questions are:

What is the realistic taxable turnover for the next 12 months?
What prices will be charged after VAT is removed?
Are there contracts or orders that could push turnover above £88,000?
What VAT was recovered on stock and assets?
Are there properties subject to an option to tax or the Capital Goods Scheme?
Would remaining registered be more profitable?
Is this a genuine reduction or an artificial separation?
What is the correct date for the final VAT Return?

Verdict: Leaving VAT Does Not Simply Mean Stopping VAT Returns

The main rule is straightforward:

You may apply for voluntary deregistration where estimated taxable turnover for the next 12 months will not exceed £88,000.

However, the correct decision requires more than comparing one figure with the threshold.

You must consider:

prices after deregistration;

standard-rated, reduced-rated and zero-rated income;

future contracts;

remaining stock and assets;

input VAT recovered in the past;

properties subject to an option to tax;

the final VAT Return;

the risk of having to register again.

A business may satisfy the £88,000 test and still decide that remaining VAT-registered is more beneficial.

Conversely, a business may consider deregistration highly profitable but later discover that retaining its assets creates several thousand pounds of VAT in the final return.

The Golden Rule

Do not apply for deregistration until you have calculated both the next 12 months and the tax cost of your final day in the VAT system.

How DCTaxAgent Can Help

DCTaxAgent can review the entire process before the application is submitted to HMRC:

taxable turnover calculation;
the forecast for the next 12 months;
the impact of pricing after VAT is removed;
comparison between remaining registered and deregistering;
stock and asset valuation;
the final VAT Return;
transfer from sole trader to Limited Company;
the risk of having to register again;
the deregistration application and supporting documents.

WhatsApp: 07587 532646
Website: www.dctaxagent.co.uk

Disclaimer

This article is intended for general, informational and educational purposes.

It does not constitute tax advice, VAT advice or financial advice tailored to an individual situation.

The exact treatment depends on the nature of the activity, the type of supplies, VAT history, pricing, business assets, existing contracts, legal structure, properties held and the effective deregistration date.

The information reflects the official rules and guidance available as at 28 July 2026.

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