You decided to transfer your business and have set up a new company for the purpose. The transfer of any business can trigger special VAT rules. When and how do they apply?
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. 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. 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. 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.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.