Turnover for VAT after change from Sole Trader to Company

[Welsh Translator]

I would be very grateful for advice on how to continue calculating my turnover for the last 12 months having recently changed from Sole Trader to a private company.

I was not VAT-registered as a Sole Trader and neither is the company VAT-registered at the present time.

The company is carrying on the same business as the sole tradership (with the same trading name), but the sole tradership ceased to exist when the company started trading. I no longer do any work on a sole trader basis.

When calculating the company's turnover to establish whether or not it has gone over the VAT threshold, should I include turnover in the period when I was still a sole trader given that it falls within the last 12 months or does the fact that the company is a distinct legal entity mean that I only need to calculate the turnover from the date the company started trading and then register for VAT if the company's turnover exceeds 68k within a 12 month period?

Thank you very much in advance for your advice.

 

[taxattack]

I would be very grateful for advice on how to continue calculating my turnover for the last 12 months having recently changed from Sole Trader to a private company.

I was not VAT-registered as a Sole Trader and neither is the company VAT-registered at the present time.

The company is carrying on the same business as the sole tradership (with the same trading name), but the sole tradership ceased to exist when the company started trading. I no longer do any work on a sole trader basis.

When calculating the company's turnover to establish whether or not it has gone over the VAT threshold, should I include turnover in the period when I was still a sole trader given that it falls within the last 12 months or does the fact that the company is a distinct legal entity mean that I only need to calculate the turnover from the date the company started trading and then register for VAT if the company's turnover exceeds 68k within a 12 month period?

Thank you very much in advance for your advice.

The transferree, ie the company, is treated for the purpose of the registration requirement as carrying on the business before the transfer, so the answer is yes, include the sole trader's turnover. (Vat Act 1994 S49).

Probably not your preferred answer!

Chris


Chris

 

[Welsh Translator]

Thanks very much for your reply, Chris - it was not the answer I wanted I suppose but I'm grateful that you've confirmed it anyway, and that you've backed it up with a reference to the relevant legislation. I haven't gone over the threshold yet but at least this info will make sure that I go about things the right way when tracking my turnover in the future. Thanks again!

 

[Marie Stein]

Hi Chris
The main reason is that otherwise, small businesses could avoid the VAT registration limits entirely by switching from one legal entity to another every time the turnover teh of the entity in question (limited company, partnership, sole trader) came close to the registration limit.
There's a useful section on the HMRC website (I can't post the url yet as I'm a new member) but it's entitled "Taking over a business and VAT registration" (put this title in the search box and it should take you there) and it deals with the very issue that you have raised.
Kind regards
Marie
VAT Exchange Limited

 

[spidersong]

Actually Chris I'm not sure that's the right reference;

Section 49 references the transfer of a business carried on by a taxable person. A taxable person is a person who is, or is required to be, registered under the act (Section 3), so if the transferor is not registered, as in this case, then Section 49 doesn't apply (unless any consideration for the sale of the business pushes it over the threshold)

Schedule 1 dealing with the requirement to register again only references a business transfered by a taxable person.

I cannot find a reference that says that the turnover of a business not required to be registered should be amalgamated with, or counted by, the new owner.

I have found this in HMRC's manual on VAT registration (V1-28) though under Transfer of a going concern (section 10):
"If the transferor is not a [FONT=Arial,Bold]taxable person [/FONT]at the time of the transfer the

transferee shall not be deemed to have carried on the business prior to the
transfer. However, see paragraph 10.5 for guidance on registration​

avoidance." (Section 10.5 is redacted from the public version of the manual, however)

Given, that if the change in entity is purely to avoid VAT then a direction can be issued under para 2 of Schedule 1 amalgamating the businesses and forcing registration, but that only takes effect from a current date forward and doesn't apply if the change in entity is part of the normal course of business.

Hope this helps.

 

[taxattack]

Actually Chris I'm not sure that's the right reference;

Section 49 references the transfer of a business carried on by a taxable person. A taxable person is a person who is, or is required to be, registered under the act (Section 3), so if the transferor is not registered, as in this case, then Section 49 doesn't apply (unless any consideration for the sale of the business pushes it over the threshold)

Schedule 1 dealing with the requirement to register again only references a business transfered by a taxable person.

I cannot find a reference that says that the turnover of a business not required to be registered should be amalgamated with, or counted by, the new owner.

I have found this in HMRC's manual on VAT registration (V1-28) though under Transfer of a going concern (section 10):
"If the transferor is not a [FONT=Arial,Bold]taxable person [/FONT]at the time of the transfer the

transferee shall not be deemed to have carried on the business prior to the
transfer. However, see paragraph 10.5 for guidance on registration​

avoidance." (Section 10.5 is redacted from the public version of the manual, however)

Given, that if the change in entity is purely to avoid VAT then a direction can be issued under para 2 of Schedule 1 amalgamating the businesses and forcing registration, but that only takes effect from a current date forward and doesn't apply if the change in entity is part of the normal course of business.

Hope this helps.

Spidersong

Thanks for that - on rereading S49 it is clear, as you say, that it refers to taxable persons, as does Sch 1.

I was led to S49 by Tottel's Vat Core Annual (07-8) which states at 3.8 "Buying an Existing Business":

If a business does not have to register immediately [ie under the Togc rules the vendor is not a taxable person], it must count the sales of the vendor when working out its liability to register from that date on the rolling 12 month basis (s49).

​

I'm now struggling to work out whether that is correct.

More generally, and also with reference to the OP (whose exact circumstances we don't know), would you agree that a Togc which is not for the purpose of Vat avoidance, ie is to take advantage of limited liability and reduction of income tax, does not fall within the powers of Para 2 of Sch 1?

Chris

 

[spidersong]

Hi Chris,

Yes, although HMRC may look at it, I don't see any real scope for issuing a direction in the circumstances you mention, where as you say a transfer is effected in the normal course of business for a variety of genuine commercial reasons.

To be honest the whole business of previous entity turnover is a bit worrying, as you say Tottels reference it, and I know that it's widely accepted that previous entitys turnover can count to registration throughout the accounting community, but when I had cause to look for a legal reference on it I couldn't find one that actually fitted, although logically there really should be to avoid a buildup to just below the limits and then an entity change!

 

[Marie Stein]

Hi Chris

This is one of those areas that is so fraught with confusion. And I should say that having gone back to the legislation, I agree with Spidersongs' interpretation that the turnover of the sole proprietor only counts towards the companys' turnover for registration limits if the SP was a "taxable person", ie registered or liable to be registered for VAT. I apologise for any confusion I might have caused by my previuos comment, I should have known better than to comment on something like this without checking teh legislation and relying on HMRCs' comments!

There is no actual piece of legislation that says whether or not the turnover of the transferee should count in so many words, but we can infer teh correct answer by the correct interpretation of the first section of the primary legislation, ie VATA 1994, Section 49 which reads as follows:

"(1) Where a business, or part of a business, carried on by a taxable person is transferred to another person as a going concern, then -

(a) for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly; and ......."

The term "taxable person" is someone who is registered for VAT or who is liable to be registered for VAT. So if the SP wasn't registered or liable to be registered at teh time of the transfer, then the transferee is not treated as having carried on the business of the transferor before the transfer and doesn't have to count the transferors' turnover towards its own registration limit.

In fact if you read the guidance on the HMRC website about this issue, it refers to the transfer of a business from a VAT registered business and says: “If you're not already registered for VAT, then to find out if you have to be registered, add your own VAT taxable turnover over the previous 12 months (if any) to that of the VAT-registered business you're taking over.”

And this is confirmed in their internal guidance at V1-28 section 10.2.1 and at section 2.3.4 of the VAT Notice 700/9 Transfers of Going Concerns.
So this does appear to be the general rule, but there will be exceptions, the main one being in respect of teh transfer of certain property transactions. And in any event, if it is your business being transferred you should read the VAT Notice 700/9 carefully to ensure that you are at least following HMRC's published guidance.

I don't have the Tottel book to which you refer but it is a well respected series of books. And one of the problems with any text book is that if you take a particular phrase or word out of context, it can be interpreted as something completely different than the author intended!

I've been working in VAT since 1981 and the one thing I should know by now is that the first starting point for any query is the law which I should have checked yesterday. But the other thing this shows is that VAT - and any other tax - is a complex subject and sometimes a question that seems simple on the face of it can't be answered with a simple yes or no and has to be researched. I've probably spent over an hour this morning double checking this point and I should know the answer to this one but trying to give a "quick" answer to something that sounds simple can lead to mistakes.
Anyway I hope this helps clarify the point for us all!

Kind regards
Marie
VAT Exchange Limited

 

[Welsh Translator]

Thanks very much once again to everyone for their time spent researching and replying to this thread. I really am truly grateful and have found it very intriguing. I had a feeling that this might be one that would lead to some discussion and I'm glad that I asked it now, if only to draw attention to a potential gap in HMRC guidance. It has confirmed something to me in the absence of clear, definitive guidance from HMRC - that in my current situation it's better to be safe than sorry, even if it means that I end up registering for VAT before I need to. The fact that I was already having to keep a close eye on my turnover before incorporation is a sign I suppose that it's just a matter of time before the company would go over the threshold in its own right, and that therefore to preempt this would be better than to try and find a justification for delaying it, thereby running the risk of HMRC telling me in 12 months time that I actually exceeded the threshold far earlier than I thought due to the need to add the sole trader turnover - although I do hear what spidersong says about it only taking effect from a current date onward in that kind of situation and also Marie's detailed and well-informed explanation above. But in the interest of having a definite way forward that I know won't fall foul of HMRC, whatever interpretation they may wish to use, I think I will register for VAT as soon as the company's turnover + that of my previous sole trader business (the part of it that is still within the rolling 12 month period) exceeds the threshold. Actually, I may even register voluntarily before then in order to plan for it since it does seem inevitable and the flat rate scheme for my sector would reduce the paperwork that I was dreading - even though I would be engaging the same accountant that I have started using for the company's accounts to file the VAT returns on my behalf. But thanks once again to everyone for their helpful contributions.

 

[CertaxBexley]

Engaging an accountant to file your vat returns, can be an expensive option, and you are still legally responsible for the return.