VAT threshold avoidance!

JamesB

Hi guys,

suppose a sole trader is nearing the VAT threshold and wants to shut up shop and start again under a limited company straight away.

Can he do this and not worry about VAT registration (until he reaches threshold).

I would have thought there may be some legislation in place to prevent people doing this?

ie say sole trader turnover was £70k for 9 months, he then closes and starts the day after a limited company doing the exact same thing. in the first month he does £20k sales thus would have gone over the limit.

In the back of my head I have a little voice saying something about if the nature of the trade doesn't change HMRC won't accept this as being a new company for vat registration purposes.

Also one last question....

if a new company thinks it's turnover will go over the threshold within 12 month's does it have to register for vat straight away and start adding it to invoices?

I'm sure you have all got a few one man band clients who deal with household customers who are not obviously vat registered, so the one man band wants to avoid vat registration as it bumps up the cost to the customer.

If the answer is yes surely the client could not register for vat until say 3/4 of the way through the year when turnover reaches £70k and could simply plead ignorance and say at the beginning of the year I didn't expect to be doing so well but trade has picked up towards the end of the year etc?

that way he/she manages to go most of the year not adding vat to invoices?

Looking forward to finding out the facts here!

Thanks,
J

RAS

My understanding is that so long as the sole trader does not breach the turnover threshold, then setting up a Limited Company will start the VAT clock rolling again.

You don't have to register for VAT if you think the turnover will go over the threshold in the next 12 months, so does give some breathing space.

Hope helps

reader

JamesB wrote: »

Hi guys,

suppose a sole trader is nearing the VAT threshold and wants to shut up shop and start again under a limited company straight away.

Can he do this and not worry about VAT registration (until he reaches threshold).

I would have thought there may be some legislation in place to prevent people doing this?

ie say sole trader turnover was £70k for 9 months, he then closes and starts the day after a limited company doing the exact same thing. in the first month he does £20k sales thus would have gone over the limit.

In the back of my head I have a little voice saying something about if the nature of the trade doesn't change HMRC won't accept this as being a new company for vat registration purposes.

Also one last question....

if a new company thinks it's turnover will go over the threshold within 12 month's does it have to register for vat straight away and start adding it to invoices?

I'm sure you have all got a few one man band clients who deal with household customers who are not obviously vat registered, so the one man band wants to avoid vat registration as it bumps up the cost to the customer.

If the answer is yes surely the client could not register for vat until say 3/4 of the way through the year when turnover reaches £70k and could simply plead ignorance and say at the beginning of the year I didn't expect to be doing so well but trade has picked up towards the end of the year etc?

that way he/she manages to go most of the year not adding vat to invoices?

Looking forward to finding out the facts here!

Thanks,
J

I'm no expert but HMRC could potentially treat the sole trade business and limited company as a "single taxable person" if they believe that VAT avoidance was the reason for the change. It would be easy for HMRC to argue the sole trade business and limited company were a single taxable person because the proprietor or the sole trade business and director of the company would be the same person, trading address would be the same, both businesses using the same equipment, goodwill brought into the ltd company from the sole trade business, etc.

HMRC could potentially find out that the limited company should have registered for VAT earlier when the limited company has to register for VAT and inspections occur (i.e. if the taxable turnover is more than £79,000 in the last 12 calendar months in the sole trade business it will probably be as high in the limited company). All "going limited" will do is defer the problem in what could be perceived as a fraudulent way. If the turnover is going to be low in the limited company (i.e. less than £77,000) then the sole trade business wouldn't have had to register for VAT as long as they got HMRC's permission.

In answer to your other question, if a new company's taxable turnover is more than £79,000 in the previous 12 months (i.e. let's say for Mar-13 to May-13 turnover was £80,000) then the new company has 30 days to register for VAT with HMRC from the end of the month that they went over the threshold (i.e. they went over the threshold at end of May 2013 so have until 30 June to contact HMRC and not charge VAT). From 01/07/2013 they have to charge VAT. If the new company does start charging VAT from 01/07/2013 and/or doesn't contact HMRC they will receive penalties and will have to pay over any unpaid VAT due + interest.

Regarding your other question about the trader pleading ignorance, ignorance may not be accepted as a reasonable excuse (which carries a 0% penalty rate). All unregistered traders in the UK have to monitor their taxable turnover at the end of every calendar month in order to ensure they have not gone over the threshold for VAT (£79,000 in the previous 12 calendar months).

JamesB

thanks guys, very helpful as always....much appreciated.

J

vickidm

I agree with Reader and also think that 'artificial separation', might become an issue if a trader followed the sole trader to ltd co route. HMRC has lots of info on their website re AS. Might be worth a read through to see if they have any info on this exact circumstance...I would imagine they would

RAS

It is a question that I have previously asked a VAT consultant who confirmed that as long as the sole trade business does not breach the VAT threshold then incorporating the business would start the VAT clock rolling again. Suggest you get specialist advise to make sure you get it right. I doubt your client would be happy if you insisted they must register for VAT when there might be an opportunity to delay, or vice versa, you advise to incorporate to delay VAT registration only to find out down the line the advice was wrong.

groundy

RAS wrote: »

It is a question that I have previously asked a VAT consultant who confirmed that as long as the sole trade business does not breach the VAT threshold then incorporating the business would start the VAT clock rolling again. Suggest you get specialist advise to make sure you get it right. I doubt your client would be happy if you insisted they must register for VAT when there might be an opportunity to delay, or vice versa, you advise to incorporate to delay VAT registration only to find out down the line the advice was wrong.

Couldn't agree more. This is not artificial separation but purely a change of sole trader to Ltd and therefore a new entity. We also have a VAT expert that we call upon. Although this forum can be very helpful to reaffirm or reassure when it comes to something as technical as VAT spending a few quid with an expert consultant can save you fortunes in the future.

I can recommend NWT VAT consultants. I have no ties with them other than I used to work at the Chartered firm where he was based.

deanshepherd

RAS and Groundy are correct.

Provided the sole-trader has not breached the VAT threshold prior to incorporation then the clock restarts.

If the sole-trader is close to the threshold be very careful how the transfer of assets to the limited company is conducted. If there is a supply from sole-trader to limited company on incorporation then it can very possibly carry total supplies over the threshold.