Can I Reclaim VAT If I Close My Business?

This is a question I am asked surprisingly often and usually at a stressful moment. Closing a business is rarely just a technical exercise. It often follows a tough trading period, a strategic change, retirement, or a move into employment. When cash flow is tight and every pound matters people naturally want to know whether any VAT can be reclaimed before everything is wrapped up.

The short answer is yes in some situations you can reclaim VAT when you close your business. However it is not automatic and it depends on timing, what the VAT relates to, whether you are still VAT registered, and what happens to the assets of the business. In some cases VAT may need to be paid back rather than reclaimed.

In this article I will explain clearly how VAT works when a business closes, when VAT can be reclaimed, when it cannot, and the common mistakes I see that end up costing businesses money unnecessarily. I will also walk through practical scenarios so you can understand how the rules apply in real life rather than just in theory.

What Does Closing a Business Mean for VAT?

From a VAT perspective closing a business usually involves two key steps:

Stopping trading

Deregistering for VAT

These two things do not always happen at the same time and the order matters.

You can stop trading but remain VAT registered for a short period. You can also deregister for VAT while still dealing with outstanding business matters. Understanding this distinction is crucial when it comes to reclaiming VAT.

VAT does not disappear just because a business closes. HMRC still expects VAT returns to be submitted up to the point of deregistration and sometimes after.

Can You Reclaim VAT After You Stop Trading?

Yes in many cases you can reclaim VAT after you stop trading but before you deregister.

If you are still VAT registered you can usually reclaim VAT on costs that:

Relate to the period when the business was trading

Are incurred as part of closing down the business

Would have been allowable had the business continued

This often includes professional fees and final expenses.

Examples I regularly see include:

Accountant fees for final accounts and VAT returns

Legal fees for closing contracts or leases

Storage costs for business records

Final utility bills

Costs linked to collecting debts or settling liabilities

As long as these costs relate to your taxable business activity and you are still VAT registered VAT recovery_attach remains possible.

VAT Reclaims on Final VAT Returns

The final VAT return is often where VAT recovery happens.

Your final VAT return usually covers:

The period up to your VAT deregistration date

Any VAT due on sales

Any VAT reclaimable on costs

This return is submitted in the normal way and can result in:

A payment to HMRC

A repayment from HMRC

It is not unusual for the final VAT return to be a repayment return especially if trading has slowed but costs are still being incurred.

Can You Reclaim VAT After Deregistering?

This is where the rules tighten.

Once you are deregistered for VAT you generally cannot reclaim VAT on new costs. VAT recovery is tied to being VAT registered.

However there is an important exception.

You may be able to reclaim VAT incurred before deregistration even if the invoice arrives after deregistration provided that:

The cost relates to the period when you were VAT registered

The cost relates to taxable supplies you made

You have a valid VAT invoice dated before deregistration

This often applies to professional fees that are billed late.

If the invoice is dated after deregistration VAT recovery is usually blocked even if the work relates to the earlier period. Timing matters a great deal here.

VAT on Closing Costs and Professional Fees

One of the most common VAT reclaims on closure relates to professional fees.

These include:

Accountancy fees

Legal fees

Insolvency practitioner fees

Consultancy costs linked to winding down

VAT on these costs is often reclaimable if the business made taxable supplies.

However if your business made exempt supplies such as financial services or residential rents VAT recovery may be restricted or blocked altogether.

This is an area where partial exemption rules often come into play.

What Happens to VAT on Business Assets?

Business assets are one of the most misunderstood areas when a business closes.

When you deregister for VAT HMRC treats this as if you have sold your remaining business assets to yourself unless an exception applies.

This is known as a deemed supply.

If you still own assets at deregistration and VAT was reclaimed on them HMRC may require you to account for output VAT on their market value.

Assets that often trigger issues include:

Equipment and machinery

Vehicles

Stock

Computers and office equipment

If the total VAT due on these assets is more than £1,000 you may need to include it on your final VAT return.

This can come as a shock to business owners who expected a VAT refund.

Can You Reclaim VAT on Assets When Closing?

Reclaiming VAT on assets when closing is usually not the main issue. The bigger risk is having to repay VAT.

However VAT may be reclaimable on assets purchased shortly before closure if:

You were VAT registered at the time

The asset was used in the business

The purchase relates to taxable supplies

That said if you then deregister shortly afterwards HMRC may claw back some or all of that VAT through the deemed supply rules.

This is why buying assets shortly before closure purely to reclaim VAT is rarely a good idea.

Special Rules for Stock When Closing a Business

Stock is treated differently from services.

If you hold stock at deregistration and VAT was reclaimed on its purchase HMRC may expect VAT to be accounted for on its value.

However there are exceptions where:

Stock is sold before deregistration

Stock is scrapped or destroyed

Stock is transferred as part of a going concern

Each scenario has different VAT consequences and needs to be handled carefully.

Transferring the Business as a Going Concern

If you sell or transfer your business as a going concern VAT may not be charged at all.

A transfer of a going concern means:

The business continues

The buyer is VAT registered or will register

Assets and operations transfer together

In this case VAT is not charged on the transfer and there is usually no need to account for VAT on assets at deregistration.

This can significantly change the VAT outcome and is always worth exploring where a sale is possible.

What If the Business Made Exempt Supplies?

If your business made exempt supplies the position is more complex.

VAT recovery on closing costs may be:

Fully blocked

Partially blocked

Allowed only under partial exemption limits

Common exempt businesses include:

Letting residential property

Financial and insurance services

Education and training providers

In these cases VAT recovery on closure is often limited and professional advice is strongly recommended.

Can Sole Traders Reclaim VAT After Closing?

Yes sole traders can reclaim VAT when closing but the same principles apply.

Key points for sole traders include:

You must still be VAT registered to reclaim VAT

Final VAT returns must be submitted

Assets retained personally may trigger VAT charges

Many sole traders forget that keeping business equipment or vehicles can create a VAT liability on deregistration.

What About Limited Companies?

For limited companies the VAT position is similar but the practical steps differ.

VAT recovery and liabilities sit with the company not the director.

When a company closes:

VAT returns must be up to date

Deregistration must be requested

Final VAT positions must be settled

If the company is struck off without dealing with VAT properly HMRC can still pursue outstanding VAT.

Common Mistakes I See When Businesses Close

Over the years I have seen the same mistakes repeated.

The most common include:

Deregistering too early and losing VAT recovery

Forgetting to submit a final VAT return

Missing VAT on retained assets

Assuming VAT refunds are automatic

Poor timing of invoices

These mistakes often turn what could have been a VAT repayment into an unexpected VAT bill.

How HMRC Approaches VAT on Business Closure

HMRC pays close attention to VAT deregistrations because they are a natural risk point.

HM Revenue & Customs will often check:

Final VAT returns

Asset values at deregistration

Whether VAT was reclaimed correctly

Whether VAT should have been accounted for

Good records and clear explanations make this process far smoother.

Practical Advice I Give Clients Closing a Business

When a client tells me they are closing a business I usually give the same core advice.

I recommend:

Do not rush VAT deregistration

Review all outstanding costs and invoices

Submit a clean final VAT return

Review assets carefully

Get advice before transferring or retaining assets

Timing is everything with VAT and small decisions can have large effects.

So Can You Reclaim VAT If You Close Your Business?

Yes you can reclaim VAT when closing a business in the right circumstances. VAT recovery is often available on final costs and professional fees provided you are still VAT registered and the costs relate to taxable business activity.

However closure can also trigger VAT liabilities particularly on assets and stock. Many businesses are surprised to find they owe VAT rather than receive a refund.

The key is planning. Closing a business is not just about stopping trading. It is about managing the final VAT position properly so you reclaim what you are entitled to and avoid paying VAT you did not expect.

If you are approaching closure or even just considering it a short conversation at the right time can make a significant financial difference.