VAT - 03.06.2019

Can new business owners reclaim VAT?

Buying or incorporating a business

When a business changes hands, whether as a sale/purchase between third parties or as an unincorporated business transferring its trade to a company, direct tax planning, i.e. for capital gains, income and corporation taxes, tends to take centre stage. While the VAT issues are usually related to compliance rather than saving tax, it’s important that you don’t overlook them.

Who can reclaim VAT?

As you know, unless you’re registered you cannot reclaim VAT on purchases (known as input tax). It’s therefore often suggested that where a registered business acquires an unregistered one, it becomes entitled to reclaim input tax on the equipment and other goods transferred which the original business had not reclaimed.

Trap. The acquiring business can’t reclaim input tax incurred by the predecessor business, regardless of why that business did not reclaim it, e.g. because it wasn’t registered or because it overlooked making a claim. If the new business owner attempted to claim the input tax it would break a fundamental VAT rule.

Who is VAT registered?

While it’s convenient to talk about businesses being VAT registered, even HMRC does it, it’s actually the business owners that register. For example, a company which owns and runs three separate businesses must aggregate the turnovers of each to check if the registration threshold is exceeded. In other words, the rules consider the position of the person (a company counts as a person for tax purposes) in business rather than the business itself. This is important for input tax because only the “person” who incurs the input tax is entitled to reclaim it. Therefore, when a business changes ownership any input tax not reclaimed by the previous owner is lost.

Working around the rules

We’ve come across a few suggestions of how you might get around the rule above. A popular idea is for the business being transferred to invoice the new owner for the goods included in the transfer. That won’t work. A business which is transferred as a going concern is a transaction outside the scope of VAT and therefore even if the old business invoices the new owners it is not allowed to charge VAT, which means there’s no input tax for the new owner to reclaim.

Tip. There’s one work-around which can work. A business owner can register shortly before the business is transferred and reclaim the VAT using the pre-registration rules. This can benefit the new business owner.

Example. Bill is not registered for VAT. Two years ago he bought equipment for his business on which he paid VAT of £5,000. Bill is transferring to BillCo Ltd a new company of which he’s a director shareholder. He registers for VAT a couple of months before the transfer and reclaims the £5,000 on the equipment. HMRC refunds/credits Bill with £5,000 which increases the value of the business being transferred (see The next step ).

For more information on VAT pre-registration and business transfer rules, visit http://tipsandadvice-business.co.uk/download (CD 20.17.05).