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To transferring a business

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Avoid losing your ability to claim old VAT

Business transfer

You started in business in your own name a couple of years ago, but because income and profits looked like they would take off, your accountant recommended you switch to a company.

The higher turnover means you will have to register the company for VAT, but your accountant says the silver lining is this will bring you a windfall.

Pre-incorporation expenses

A company can reclaim VAT on purchases made by you before it was formed as long as:

• the expenditure was incurred for the company
• the company reimburses you, or makes arrangements to reimburse you
• you became a shareholder, director or employee of the company and weren’t making supplies that VAT could have applied to if you were registered
• you incurred the expenditure for the company’s business and haven’t used the goods or services for any other purpose.

Example. Bert sets up a high street print business after the one he worked for closed down. He buys a van and rents a shop which he fits out shortly before he forms Bert Ltd. The van cost him £25,000 plus VAT of £5,000. Bert is appointed sole director of the company. After formation it credits his director’s loan account with £30,000. This counts as an arrangement to reimburse him. Bert Ltd registers and reclaims the £5,000 VAT shown on the invoices given to it by Bert.

Tip 1. It doesn’t matter that the invoices are in your personal name. The company can reclaim the VAT because the supplies were always intended for it.

Tip 2. You have four years in which to make the claim.

Existing business

However, the situation would be different if you were simply transferring an existing business.

Trap. If you transfer your sole trader (or partnership) business to a company, this will fall foul of the conditions listed above. Unless you take the right steps you’ll lose the chance to reclaim past VAT for ever.

Solution

Even if you intend to stop trading as a self-employed individual, you can register for VAT. In fact, you can backdate it up to four years, but usually this won’t be a good idea as you will have to account for VAT on the past sales you’ve made.

Instead, register the sole trader business for the very last few days of trading only.

Tip. Once registered you can reclaim VAT paid on goods you have on hand plus any services you’ve received in the previous six months, which you intend to use to make taxable supplies. The business can then be transferred to your company as a going concern (see The next step ).

For a link to transferring a business, visit http://tipsandadvice-vat.co.uk/download (VA 08.06.06).