How the VAT Deregistration Will Affect Your Business Financials

Written By Akshaya Ashok, Reviewed By Retheesh R S

Published on 18/11/2024

In the UAE, Value Added Tax (VAT) deregistration is a major economic occurrence that can define the trading prospects of a business deeply.  Growth or contraction or changes in businesses may call for VAT deregistration but this should be done bearing in mind the implications of the results. Deregistration from VAT entitles certain consequences, including the inability to recover VAT on business expenditures as well as VAT on unsent invoices. Due to this effect, there is a need for businesses to understand the financial aspect well when it comes to VAT deregistration.Here we discuss the financial implications of VAT deregistration, including considerations and recommendations on how the UA Emirates businesses can manage the change effectively.

Reasons for VAT De-registration

Voluntary deregistration of VAT

A business may apply for voluntary de-registration from VAT due to various reasons:

• Low Turnover Levels: Voluntary deregistration is also available when a business knows that after some time its turnover will be less than the threshold level of VAT, which is discovered to be £83,000 for the United Kingdom. In this way, the business might deliberately deregister at a time when there is low activity in the particular business.
• Change in Business Structure: some of the causes of deregistration are: Structural changes such as converting from a sole trader to a limited company or joining a VAT group
• Change in Business Activities: A business that is no longer engaged in supplying goods and services that attract VAT or supply only exempt goods and services may not satisfy the requirements for VAT registration and therefore needs to apply for deregistration.

Mandatory Deregistration from VAT

In certain situations, VAT deregistration becomes a necessity.

• Ceasing Trading: When a business ceases to operate and no longer functions, it is required to deregister to eliminate further compliance requirements.
• Turnover Below Threshold: Where a business taxable turnover has, for a continuous period, been below the threshold, or where it is likely to remain below it for the next 12 months, it should be deregistered.
• Registered in Error: Sometimes the company is registered for VAT incorrectly and needs to deregister.

Financial Implications of VAT Deregistration

• Loss of VAT Recovery on Business Expenditure: After deregistration, a business can no longer recover VAT that it pays on its expenditures; which can increase operational costs significantly, especially for those enterprises using the recovery of VAT to offset charges.
• Potential VAT Liabilities of Outstanding Invoices: A business will incur unforeseen financial liabilities through the process of deregistration in paying VAT on outstanding invoices.
• Impact on Cash Flow and Working Capital:  Deregistration can strain cash flow because the business is no longer able to recover input VAT which often involves price or budget adjustments to cover added costs.
• Change in Accounting Function:  A deregistration company will change the necessity of Accounting. It will no longer have VAT collections & the compliance burden will be relieved; however, changes will be required in financial reporting and taxation obligations.

 Important Considerations Before Deregistering

Business Operations and Turnover Revalidation

Step back, review the business operations, and assess the turnover. Compare any turnover that may be projected in the present with the VAT registration threshold. Check whether the business can sustain profitability without the benefits of VAT. If the turnover forecast remains below the threshold, then deregistration can be available.

VAT Consequences of Contracts and Agreements Analysis

Review all contracts in existence to identify deregistration implications on VAT obligations. Both the consideration of whether contract terms express prices inclusive and exclusive of VAT do in fact reflect cash flow and post-deregistration pricing conditions. A proper draft of each contract avoids unintended VAT liabilities and shields each of the parties involved.

VAT Registration Alternatives

Exploring other available registration routes to settle VAT, such as being automatically registered if the business has significant input VAT that is recoverable and studying the pros and cons of remaining registered versus deregistration.

Post-Deregistration Obligations

• Must Notify UAE Tax Authorities

A business needs to notify the UAE tax authorities of its decision to deregister by fulfilling the needs stated in relation to time to the time stipulated in the local regulation.

• Submission of Final VAT Returns

An absolute VAT return should be filed covering all outstanding transactions up to the date of deregistration.

• Payment of Outstanding VAT Liabilities

All outstanding VAT liabilities shall be paid within the timeframe of deregistration. Failure to do so may lead to such liabilities with penalties or legal action.

• VAT Record Preservation

Once a business has deregistered, VAT records should be preserved for five years for purposes of audit or review by the tax authorities.

Mitigating Financial Risks

Planning for VAT Deregistration

Review financial position, but not without considering turnover estimate and operational requirements. Consider whether it will impact cash flow and working capital since deregistration will strip away the potential of recovering VAT paid on statutory expense incurrences prone to cost overruns.

Cash Flow and Working Capital on Deregistration

Cash flow and working capital will be further strengthened with the following measures:

• Budgeting and Forecasting: Develop proper financial estimates in view of the expected fluctuations in revenues and link cash requirements to future business operations.
• Accounts Receivable: Promote pre-payment by offering incentives or penalising for delayed payments
• Inventory: Follow the practice of just-in-time and curtail overstocking, this enhances liquidity and frees up cash

Revisit Contracts and Agreements

Presently, these contracts must be checked from the angle of VAT implications if the status changes: potential repercussions on pricing, payment, and obligations. Customers and suppliers should always be consulted to avoid misunderstandings or miscommunications that may lead to monetary disputes or unbudgeted liabilities.

Consult Experts

Tax consultants or even financial planners should be sought on matters regarding financial and contract implications of deregistration. Experts can help optimize cash flow while reducing possibilities of risk and complying with local tax regulations.

Conclusion

VAT deregistration is highly complicated and needs tight planning, so you must get expert advice for clear financial decisions. This is not any kind of fiscal transaction; there are liabilities in VAT for businesses, cash flow implications, and obligations in contracts before deregistration. Reyson Badger's VAT experts will guide you through the process with complete compliance and reduced financial risks. Do not let VAT deregistration take over the financial life of your company. Contact Reyson Badger to help you secure the financial future of your company. At Reyson Badger, you will make the right decisions about VAT, maximize the strategies for VAT, and gain business success in the UAE.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.