VAT on winding down a business

At the end of a business’s life, there comes a time when trade ceases.  In principle, VAT is chargeable and recoverable on the supplies of a trade, and therefore when that trade stops, so does the accounting for VAT.

INSOLVENCY

If the business is insolvent, then it is important to begin action to wind it up promptly.  This is in part because continuing to trade whilst knowingly insolvent is potentially damaging to creditors.  If necessary, a third party should be recruited to handle the winding down of the business, as this protects everyone’s interests.

REGULATORY BODIES

All regulatory bodies should be kept informed, including HMRC.  If closure of the business is related to regulatory problems, then it will be important to attend to any requirements of the regulator in terms of limitations on the ability to trade.

VAT

Normally, a business has to tell HMRC within 30 days of ceasing to trade.  If an insolvency practitioner has been appointed, they usually have to notify HMRC within 21 days of their appointment, and will then cancel the VAT registration when appropriate.

During the wind-down period, even if there is no income, VAT can normally be reclaimed on costs incurred pre-closure, as long as they are for business purposes, and only in so far as incurred to complete and wind up the trade in question.

The interactions between VAT, insurance, insolvency and other intervention costs can become complex, and may be best left to an insolvency practitioner.

MAIN TAKEAWAYS

In general, advise HMRC within 30 days of ceasing to trade.

If the business is insolvent, then it is important to act promptly, partly because there is a duty to look after the interests of creditors.

If the insolvency is significant, then it may be wise to appoint an insolvency practitioner who can take over the winding up and ensure all obligations are appropriately handled.

Further reading:

Cancelling a VAT registration – government website

Insolvency and VAT – government website

Deferment of deregistration and continued reclaiming of VAT – government website