One of my clients. who is a cafe owner (one shop), has recently secured a contract to operate 3 work canteens. The combined turnover will easily take her above the VAT threshold. For tax purposes I have suggested she sets up a Ltd Company. My question is related to VAT. Does the turnover start afresh with the Ltd Company when calculating when to go VAT registered, or should the previous sole trader turnover also be taken into account? She would cease being a sole trader once the Ltd Company is set up.
Here is the VAT act section mentioned in the post above..
49 Transfers of going concerns.
(1)Where 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
(b)any records relating to the business which, under paragraph 6 of Schedule 11, are required to be preserved for any period after the transfer shall be preserved by the transferee instead of by the transferor, unless the Commissioners, at the request of the transferor, otherwise direct.
(2)Without prejudice to subsection (1) above, the Commissioners may by regulations make provision for securing continuity in the application of this Act in cases where a business carried on by a taxable person is transferred to another person as a going concern and the transferee is registered under this Act in substitution for the transferor.
(3)Regulations under subsection (2) above may, in particular, provide
(a)for liabilities and duties under this Act (excluding sections 59 to 70) of the transferor to become, to such extent as may be provided by the regulations, liabilities and duties of the transferee; and
(b)for any right of either of them to repayment or credit in respect of VAT to be satisfied by making a repayment or allowing a credit to the other;but no such provision as is mentioned in paragraph (a) or (b) of this subsection shall have effect in relation to any transferor and transferee unless an application in that behalf has been made by them under the regulations.
-- Edited by FoxAccountancyServices on Saturday 14th of June 2014 02:12:38 PM
This is a common question. Michelle is right to point out that the TOGC legislation always refers to the transferor/vendor as a 'taxable person.' Thus, if the transferor/vendor is not liable to register for VAT, then the TOGC provisions cannot apply. This means that the transferee/purchaser can ignore the turnover of the transferor/vendor.
Whilst I appreciate that this may be abused, it does seem to be clear in the legislation. Also, HMRC guidance nowhere refers to a TOGC BEFORE registration for VAT.
This is a common question. Michelle is right to point out that the TOGC legislation always refers to the transferor/vendor as a 'taxable person.' Thus, if the transferor/vendor is not liable to register for VAT, then the TOGC provisions cannot apply. This means that the transferee/purchaser can ignore the turnover of the transferor/vendor. Whilst I appreciate that this may be abused, it does seem to be clear in the legislation. Also, HMRC guidance nowhere refers to a TOGC BEFORE registration for VAT.
Thanks Les, I got the same impression from reading the link Michelle gave. One caveat though, apparently you mustn't set up a Ltd Co just to avoid the impending VAT, there must be a legitimate reason for doing so, otherwise you have to take into account the sole trader turnover as well.
Thanks Les, I got the same impression from reading the link Michelle gave. One caveat though, apparently you mustn't set up a Ltd Co just to avoid the impending VAT, there must be a legitimate reason for doing so, otherwise you have to take into account the sole trader turnover as well.
Regards
John
This was something that was running through my mind.
The Ltd company is being considered for only one purpose, and that is avoid breaching the threshold, and no other commercial reason. This, I would have thought, would be regarded as artificial separation/ disaggregation
Bill and John make important points. However, if a business is transferred from a sole trader to a limited company, then I do not think the disaggregation provisions will apply.
You should consider whether to obtain paid professional advice on this issue.
Usually the disaggregation rules are about artificially splitting a business, that's not the case here so I wouldn't think it falls foul of the rules and possibly (With the specialist advice suggested by Les) comes under the heading of excellent tax planning for which you make a premium charge!
Hmmmm...... if you went Ltd to avoid income tax.. that's kind of sort of a legitimate reason, and isn't to avoid VAT!!!
Could be that the VAT was a brucey bonus?
HAHAHAHAHAHA!!!!
No seriously... like with many other things (this week for me - flat rate percentages) HMRC are never quite specific ENOUGH, and you basically have to suck it and see! There is no guarantee it will be accepted, but there's also no guarantee you will get investigated.. its living life on the edge, this stuff!!!
It could be that this person went Ltd Co to cover herself from personal liability, having taken on these big new contracts. Business has changed, not just the VAT threshold loomed. She might need to employ people, and prefer to do that under Ltd Co guise. And obvs, there is an income tax advantage. Would she have anyone else as a shareholder? Will business structure change? Is that an option?
I don't think there is a concrete answer. Consider every angle, make notes, consult with client, tell them the up and down side, and the possible outcomes, and let them decide. And of course, if you really feel at a loss, pay someone who has knowledge of those sorts of investigations :)
