As a general rule, when a business is de-registered for VAT, it is effective from the day such a request is made, provided de-registration is valid. Traders wishing to cancel their VAT registration for any time other than at the point of application will be knocked back. Retrospective de-registration was however the grounds of an appeal made by Inspired by Service Ltd to the First Tier Tax Tribunal, most recently.
Inspired by Service ran a business as an unlicensed restaurant and café in Harrogate, having purchased it as a going concern. After taking advice from its then accountant, TaxAssist of Harrogate, the company applied for voluntary VAT registration from November 2011, although its turnover was below the registration threshold.
TaxAssist of Harrogate had apparently advised their client that once registered for VAT the business would not be liable to account for VAT until its turnover exceeded the threshold for compulsory registration. Michael Miller, one of the directors of Inspired by Service, was therefore surprised to receive a VAT assessment for the quarter ending February 2012 which prompted him to telephone HMRC.
As VAT returns for the four quarters to November 2012 were not filed until October 2013 and no successive returns filed whatsoever, these were the subject to the VAT surcharge regime.
In August 2014, Inspired by Service informed HMRC that it had changed advisors. Very soon after, the new advisors applied for its client to be de-registered on the basis that its taxable supplies were below the registration threshold, and indeed had been ever since it started trading. HMRC accordingly obliged and de-registered the company with effect from 12th August 2014.
For the period 1st November 2011 – 12th August 2014, the company had paid approximately £15,000 in VAT and had had various surcharge notices levied against it. None of this would have happened had it not been registered in the first place.
In July 2015, the new advisors wrote a long and detailed letter requesting that de-registration be backdated to 1st November 2011 but this was rejected by HMRC who cited Schedule 1 Paragraph 13(1) of the VAT Act 1994:
“….where a registered person satisfies the Commissioners that he is not liable to be registered under this Schedule, they shall, if he so request, cancel his registration with effect from the day on which the request is made or from such later date as may be agreed between them and him”.
An appeal was therefore progressed to the First Tier Tax Tribunal on the basis that as a result of fundamentally wrong advice the company should never have been registered in the first place as there was no obligation for them to do so.
HMRC fully accepted that Inspired by Service was not liable to be registered as it was trading below the VAT threshold, but maintained that it was entitled to be registered at the time as it was carrying on a business of making taxable supplies.
Although there are circumstances in which retrospective de-registration can be permitted, these relate to erroneous registration, such as registration of a wrong business entity, or the registration of a business which makes only exempt supplies or which does not intend to make taxable supplies at all. None of these were present in this case.
In the opinion of the tribunal judge, HMRC did not have the power to cancel the registration retrospectively. Furthermore, had it done so, then the department would have been acting unlawfully. The appeal was therefore dismissed.
With the new limited cost trader classification, which imposes a flat rate of 16.5%, only months away, there may be contractors wishing to de-register on 31st March 2017 should they be eligible to do so. This new rate is likely to increase the VAT bills of some contractors and for those who are entitled to de-register, they should ensure that they make their request before 1st April 2017.