Upon start of a trading relationship between A and B, Business A, a sole trader non vat registered, initially bought stock of goods from several existing suppliers for which the sales are made by B. All the purchases involved bore VAT at 20%. Business B, which is a Private Limited Company, is VAT registered, using cash accounting, and now makes all the purchases as well as sales. The initial purchase of stock by A was done as A had the contacts with the suppliers and in order to fund B; far simpler and better would have been a loan to B from A in order for B to buy the stock but hindsight is a wonderful thing.
While A remains below the vat threshold, it is disadvantageous for it to be registered for vat due to the nature of its trade and it does not want to go down this route despite potentially being able to invoice Co B with vat invoices for the several amounts under discussion.
If A invoices B for the initial purchases, then clearly B will be unable to reclaim the vat as A's invoices are from a non vat registered business. The amount of the vat potentially irrecoverable is around £1500, which is enough to be material for the small businesses involved.
It is not very practicable to unwind A's payments to the initial suppliers; i.e., for the suppliers to refund A and then for B to pay the several amounts involved. Not only has the VAT period expired but some of the relationships with the original suppliers have soured. However, this may be a partial solution (i.e. exclude those suppliers where the relationships have soured).
If the owner of A became a director of B Ltd, albeit for a short period, would he then be able to reclaim the initial stock bought some while ago on the company's behalf?
Are there any other solutions?
I look forward to your comments.
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Replies (5)
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HMRC guidance in Notice 700, chapter 11 is the place to start. If you cannot bring yourself within its provisions, you may be forced to seek specific agreement from HMRC.
The link is here: https://www.gov.uk/government/publications/vat-notice-700-the-vat-guide/...
Thanks for your response. I can see that my description wasn't clear enough. In fact, B had already been vat registered for some years, while A has never been registered for VAT and does not want nor need to be due the nature of its business.
So it isn't a question of claiming vat before registration.
I shall amend the description accordingly.
A may wish to act as agent for any future purchases with B as principal so it can reclaim the VAT.
Time to bite the bullet and realise A is stuck with the VAT unless it registers in its own right.