VAT - 13.06.2018

VAT when incorporating your business

After taking advice from your accountant you’re transferring your business to a company to achieve direct tax savings. The transfer will also have VAT consequences. What are they and how should you tackle them?

Direct tax

The motive for incorporating a business, that is working through a company instead of being self-employed or in partnership, is often to reduce tax on profits and allow for more flexible tax planning. VAT doesn’t usually figure in the decision as the rules work similarly whatever the business structure. However, VAT issues do arise from the transfer itself and overlooking them can cost you.

A TOGC

Where an unincorporated business is transferred to a company, the transaction is known as a “transfer of a going concern” (TOGC), which is outside the scope of VAT (see The next step ). This means no VAT is chargeable even if the company pays the sole trader or partnership for its assets.

Trap. There are exceptions to the TOGC rule; it won’t apply if the sole trader or partnership is VAT registered but the company isn’t and isn’t required to be. Failing to meet the registration condition would mean that the sole trader or partnership would have to charge the company VAT on the value of all the assets it transfers to it.

Tip 1. To avoid the trap make sure the company is registered as an “intending trader” before the transfer takes place, or has applied to HMRC for registration to take effect from that date.

Tip 2. To simplify the registration admin the company can take over the VAT registration of the sole trader or partnership. Normally where a business is transferred the advice is for the transferee not to take the transferor’s registration because doing so means they inherit the VAT record, warts and all. However, you’ll be the owner of the business before and after the transfer and so there won’t be any VAT skeletons hiding in the cupboard to worry about.

Old business purchases

If your unincorporated business isn’t VAT registered, but will be after it has been transferred to a company, even if that’s months or years later, you need to take steps to avoid potentially losing out on reclaiming VAT. Trap. A company can’t reclaim VAT paid on purchases made by the predecessor business.

Example. John bought machinery costing £30,000 plus £6,000 VAT when he started his business as a sole trader. A year later his business has grown and he chooses to incorporate it and transfers all its assets (including the machinery) to John Ltd, which registers for VAT soon after. John Ltd isn’t entitled to reclaim the £6,000 VAT for the machinery.

Tip. To avoid losing out on the VAT, John should register his old business prior to the transfer, a day or two will suffice. Subject to time limits and conditions, the old business can reclaim the VAT on the machinery and any other purchases the old business made and then cancel the registration or transfer it to the company. This will mean that John Ltd will need to register for VAT immediately or the transfer won’t count as a TOGC (see the first Trap ).

For more information about TOGCs and pre-registration VAT, visit http://tipsandadvice-tax.co.uk/download (TX 18.18.07).

If your current business is registered, make sure the new one is too or you’ll have to charge VAT on the assets you transfer to it. If your current business isn’t registered, register it before the transfer so you reclaim VAT on any machinery and other assets being transferred. If you don’t, you’ll lose the right to reclaim it.

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