DEREGISTER FOR VAT (hospitality industry) if due to cease trading in next 6 months

Sole trader running a small cafe/restaurant in the hospitality industry. Began trading: October 2022 Registered for VAT as hit threshold: March 2023 Joined flat rate scheme for hospitality: March 2023 Left flat rate scheme (as hit the £150k allowance) :August 2023 So now on 20% and this has essentially put the business under… we have very very little vat we can claim back as all our produce that we use to generate our turnover is zero rated. It’s just ridiculous. We just simply cannot afford the 20% VAT on our turnover. Prices across menus are already at the top end, increasing prices further would heavily affect reputation and sales. As a result of this, we cannot afford to pay the VAT and we’re going to have to cease trading in the next few months once staff have been laid off and suppliers paid up as best as possible etc… QUESTION 1: My question is, can I DEREGISTER for vat as we plan to cease trading and not go over the threshold? QUESTION 2: Am I missing something? If any one has any ideas on how to make this business viable or anything I am missing to help with the VAT situation if would be greatly appreciated. It is a fantastic business/restaurant and our local customers absolutely love it but the VAT is simply making it not financially viable. Everything was fine until it had to register for VAT and we have nothing to claim back. It’s so sad. Maybe I’ve missed some form of help somewhere… QUESTION 3: What happens if I now Deregister for VAT as plan to cease trading in the next few months but then find a business structure that could potentially be viable (I.E getting rid of a chef, or negotiating rent etc) and then decide to carry on trading later down the line - can I just re-register for VAT at that point if for some miracle we do decide to carry on trading? QUESTION 4: Final question, what do we do if we don’t have the money to pay the current outstanding VAT bill and the company is going to cease trading? This whole situation has riddled me with anxiety as I have 15 people on the payroll who absolutely love their jobs and due to the VAT we are going to have to lay everyone off and cease trading. It’s horrible because we have the customers there, people want to use our restaurant but the numbers just don’t add up when the VAT is introduced. It wouldn’t be as difficult if we actually had VAT we could claim back but everything we use to produce meals is ZERO rated. The other big bill we have is electricity which is recharged to us from our landlord… Thank you

Hi,

The Flat Rate Scheme is the main scheme which is designed to help smaller businesses. You can see the requirements for being able to stay on the Flat Rate Scheme here:

Leaving the scheme

If you cease to trade or your tunover is forecasted to be below the deregistration threshold over the next 12 months then you can deregister from VAT. Please see the guidance here:

Compulsory VAT registration cancellation

If your business picks up then you can choose to register for VAT at any time. You can see the guidance here:

VAT: an introduction

Thank you.

Could you reduce your trading hours to 3/4 days per week, therefore reducing turnover and going back onto the flat rate scheme whilst you decide on the future of your business?

Thank you for all the comments so far. Very helpful. Can I just check, are we able to stay on the flat rate scheme for hospitality if our annual turnover is less than £230,000 ? Apologies I’m just finding this all confusing and hard to get my head around. Thanks again.

The customer pays the VAT to you when the customer buys a drink or snack. If you cannot afford to pay HMRC the VAT (that you collected from the customer), then this means you have spent the VAT on something else. Most business will ringfence the VAT they have collected from their customers so that there is no temptation to spend the VAT on something else, the VAT belongs to HMRC. Whether you charge £1.20 for a coffee or £2.40 the price includes the VAT element that the customer pays to you and you pay to HMRC. VAT should just pass through the business. Under the flat rate scheme, you charge the customer 20% VAT but pay over to HMRC a flat rate of 12.5%. For example, you sell a coffee for £1.00 + 20p VAT (total £1.20), the £1 is your sale/turnover and the 20p belongs to HMRC but under the flat rate scheme, you would pay over 12.5% of the gross sale, the gross sale is £1.20 so £1.20 x 12.5% = 15p. In this example you receive £1.20 from the customer, you pay over 15p VAT to HMRC and you keep the difference (5p) plus the £1.00 (£1.05 in total). Q1. You will not be able to deregister whilst you have outstanding VAT return/VAT liabilities owed to HMRC else, you can only deregister when your rolling 12 month turnover goes below £83,000 or if the business ceases to trade. If/when you cease to trade or deregister, you may also have to pay output tax on the value of any stock, assets or goods on hand at time of deregistration. As a sole trader unable to pay their VAT liability, speak to HMRC time to pay/debt management team to see if you can set up a payment plan. https://www.gov.uk/difficulties-paying-hmrc/pay-in-instalments Once you are on the FRS, you can remain on it until your turnover exceeds £230,000 see section 11 here https://www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-notice-733--2#leaving-the-scheme and also note that the £230k test is an annual test done on your anniversary of joining the flat rate scheme (same link section 12.3) and also note that once you leave the FRS scheme, you cannot rejoin it for 12 months.

Hi Kendal Cooper,

You will need to check on your anniversary of joining the Scheme and if your turnover has gone over £230,000 (VAT inclusive) in the past 12 months then you will need to come off the scheme.

However if your turnover has gone above the £230,000 (VAT inclusive) limit but you expect that your turnover in the next year will fall below £191,500 (VAT inclusive) in the next year, you may be able to remain on the scheme with HMRC’s agreement.

If you wish to remain on the scheme in those circumstances, apply in writing to the National Registration Unit at the following address:

BT VAT
HM Revenue and Customs
BX9 1WR
United Kingdom

Thank you.