VAT is an important aspect of a business. However, there are instances where businesses find it necessary to deactivate their VAT number. Understanding the proper cancellation process and comprehending its advantages and disadvantages is crucial in such scenarios.

Reasons for cancellation of VAT registration

1 Reduction in the volume of operations

If a company’s operations experience a significant decline, causing it to fall below the mandatory registration thresholds within a few months, opting to deactivate VAT registration can be a logical step. Managing VAT payments involves considerable complexities and obligations, making deregistration a practical consideration in such circumstances.

2 Closing a business

In case of closing a business or changing its legal form, it’s mandatory for the company to inform the tax authorities and proceed with terminating its VAT registration. Failure to do so can result in penalties and the company will be held liable.

3 Merger or division of companies

A review of the VAT status becomes necessary during mergers or divisions involving companies. Instances arise where a company transitions from a sole proprietorship to a limited liability company for tax optimization purposes. In such cases, notifying tax authorities becomes crucial, often requiring the cancellation of the VAT number associated with the sole proprietorship and the subsequent opening of a new one for the company.

4 Termination of supplies

The discontinuation of supplies or the cessation of business operations in a specific country can occur due to various strategic and financial motives. This scenario often prompts the need for deregistering a VAT number. Such situations may arise from diverse circumstances, including business reorganization, reevaluation of market strategies, or alterations in logistics and production processes.

Advantages and disadvantages of VAT deactivation

Advantages

Lower prices

When a company is deregistered for VAT, it is no longer required to include value-added tax in the cost of its goods. This can reduce production and supply costs, which in turn can lead to lower retail prices for goods.

Simplified accounting

Deregistration of a VAT number can ease administrative procedures for a company, as it is no longer obliged to file regular tax reports and fulfill other tax-related duties.

Savings

Deactivation of a VAT number significantly reduces the tax liabilities associated with transactions subject to VAT. This is especially true if the company ceases operations or changes its business model.

Reducing audit risk

Deregistration significantly reduces the audit risk, as the company is no longer subject to tax control concerning taxable transactions. Consequently, this minimizes audits conducted on your organization and alleviates the tax-related pressure on companies.

Disadvantages

Restrictions on the ability to expand operations

If the company plans to expand its activities in the future, the absence of a VAT number may become an obstacle in interacting with other companies that require such a number for cooperation.

Problems in the future

If, in the future, the company decides to renew its VAT number, it may require additional efforts and costs for re-registration, as the tax authorities will check your company more thoroughly. In some cases, you must provide a fairly extensive package of evidence to renew your VAT number.

Refunds

With the deregistration of the VAT number, companies will no longer be able to reclaim VAT paid on products or services purchased for their own use.

Reputation

When a company isn’t registered as a VAT payer, it can create an impression of tax evasion. This perception might lead to alienating customers and contractors, as the business could be perceived as smaller and less reliable in most cases.

Administrative burden

Companies need to monitor their turnover on a monthly basis to avoid exceeding the registration threshold, which in turn requires additional efforts in accounting and reporting.

Step-by-step action plan on how to cancel VAT registration

1. Make sure that your business meets the conditions for VAT deactivation by the laws of a particular country.
2. Prepare all the necessary documents confirming the grounds for deregistration.
3. Apply to the tax service online or at the office with a statement of intent to cancel your VAT registration.
4. Wait for your application to be processed and provide additional evidence or extracts if necessary.
5. Receive the decision. Receive a response from the tax office and fulfill any requirements regarding the payment of the last declarations or other specifics.
6. Deregistration. Once all the rules are met, your number will be deactivated, and you will no longer be a VAT payer in the country of deactivation.

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Summary

Deactivating a VAT number is a serious step that requires careful consideration and proper preparation. Business owners should consider all aspects before making such a decision and consult with professionals. However, with the right approach, VAT deactivation can become an important tool for optimizing a company’s financial condition.