16 Apr

Incorporating a Non-VAT Registered Business

Here are some important points to be looked at when incorporating a non-registered business and what turnover you need to take into account.

In some instances, a business may start as a sole proprietor or partnership and then decide to incorporate after nine months of trading. The turnover is nearing the VAT threshold and the business owners decides that incorporation is the correct decision. If the business fails, they will have limited liability, the remuneration package could still be better than trading as a sole proprietor or partnership, and as a result they are starting again if then avoid registering for VAT for a while.

Changing Legal Entity

If a business wants to defer registering for VAT by incorporating, the timing is crucial. Providing that the turnover is below the threshold at the time of incorporation, the turnover of the existing business is not carried forward to the newly-incorporated business. Normally, when a business is acquired as a transfer of an ongoing concern, the existing turnover is taken into account based on a rolling twelve month period.

However, for it to qualify as a transfer of ongoing concern (TOGC), the business being acquired must be a ‘taxable person’ (registered for VAT or ‘registerable – required to register even if it had not registered), if the existing business is not registered for VAT nor is its turnover over the VAT registration threshold it is not a ‘taxable person’. The change of legal entity is not a TOGC and the turnover of the unincorporated business is not carried forward to the new incorporated business.

Obvious Tax Avoidance

Certain businesses have tried to repeatedly change their legal entity as they approach the VAT registration threshold by incorporating and then un-incorporating as they approach the registration threshold. HMRC now have the power to treat two businesses as one, known as disaggregation, and these powers would be used in such circumstances to treat two businesses as one and force VAT registration.

HMRC can only impose a disaggregation direction from a current date so it could not be imposed retrospectively.

Turnover Traps

Some business run their luck and try and take this one step too far, and having failed to accurately monitor their takeover find that they have exceeded the VAT registration threshold and did not register for VAT on time. They then incorporate and think they can start again and avoid registering for VA|T until the company’s turnover reaches the VAT registration threshold

They can only avoid the TOGC provisions regarding turnover if they are not a taxable person. If you exceed the VAT registration threshold you become a taxable person even if you are not VAT registered. The incorporated business is therefore taking over the old business as a TOGC and inherits its turnover and will be registerable from the point the old unincorporated business exceeded the VAT registration threshold.

Under these rules, the chain of past earnings is transferred to the new entity every time. Thus the turnover levels do not stop to be started again, but will be added to the earnings of the new entity.

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