Husband and wife have a partnership running for last 3 years. Wife's health is suffering and may be wont be involved in the business and the sales have dropped due to cost of living crisis. They want to dissolve the partnership. Husband wants to carry on same trade but as sole trader, under the sole trader, the sales will be below VAT regsitration limit. Would the husband need to VAT register still or the sole trader business will be separate entity subject to VAT registration rules from scratch? Or best keep the partnership and de-register the VAT.
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I was hoping someone more qualified than me would advise i will give it a go though.
If you take viewpoint that your next 12 month sales will be below vat dereg whatever trading status you have 4 options now.
you could vat dereg now on basis next 12 months would be below threshold for partnership anyway - if above threshold thats subject to hmrc agreement. one issue here is if you start sole trader when business turnover is over 83k i dont know for sure but you may need to rubber stamp with vat office that sole trader doesnt need to be vat registered when you take over (you might have right to use calcs apporved by vat office - i dont know). middle groudn here is to vat dereg and then move to soel trader when turnover deffo below on rolling test.
you could transfer vat reg to sole trader then do dereg application on basis future turnover will be below 83k - again subject to vat office approval. not keeping vat number here. tis is probably cleanest option.
you could transfer vat reg to sole trader then do dereg applicatiin on basis turnover will be below 83k - again subject to vat office approval. keeping vat number here - this may be very messy if vat office take 9 months to swap vat numbers.
you could wait tilkl turnover reduces below threshold but this isnt needed - if you can evidence future 12 months turnover will be below threshold you have the right to deregister (subject to vat office rubber stamping). Note you CANNOT bring the change in trading status into the equation here if you dereg while partnership.
there may also be other options - but swap to sole with new vat number then apply on lower future turnover to me is probably easiest albeit you will still have to wait for new vat number to be issued. option 1 may tump this option if approval for dereg granted to partnership carries over to sole trader calcs so its a given sole trader wouldnt need to get aproval not to be registered!
On dissolution of partnership, you could deregister the partnership and re-register the sole trade business and start afresh. Alternatively, you could transfer the VAT registration number over to the sole trade (s.49(2) & (3) VATA 1994). Upon transfer, the previous registration will have come to an end and the new registration will take effect, albeit under the same VAT number (Reg 6(1). This is achieved by notifying HMRC under Reg 4B(1)(c ) by filling in form 68.
Whilst it may not be relevant to your case, with this transfer the transferee becomes liable for all the liabilities (e. g. on account of VAT errors) of the business carried out in its previous avatar!!
I would think that whether or not to stay VAT registered is a commercial decision. If your customers/clients are VAT registered businesses, it doesn’t matter, they would recover the input VAT anyway. Where they are non-VAT registered or non-business ones, you stand to gain by not being registered for VAT and continuing to invoice them as before at £120 (without VAT). So, if you do not expect to hit the registration threshold in the near future you might want to deregister.
One other point ... we've not been told the nature of the trade (which might have substantial purchases of items for re-sale) - or indeed whether a VAT scheme (like FRS) is being used?
You say wife "maybe won't be involved with the business". You need to clarify that first because it appears to be only a "maybe" that the partnership is finishing.
Even if the wife is no longer involved, she could still remain a partner. I have a lot of family partnerships where the older generation gradually reduce activity to the point they do nothing, but they still have a capital stake in the business, so they remain partners. There are numerous tax and commercial reasons why formerly active partners may or may not remain sleeping partners in the business.
The decision to retain the partnership or not has nothing to do with the VAT. That's a separate issue. If a business turnover falls below the deregistration threshold, you can choose to deregister but need to consider a few factors including (1) do they have any goods on hand (stock, equipment) because they may have to pay output tax on these on deregistration and (2) is the customer base VAT registered or not?
If the decision is to deregister from VAT, I would deregister the partnership. There doesn't seem to be much point registering the sole trader only to deregister later.
Hi All,
Thank you very much for your guidance, I was not well few days so could not post much.
So would it work:
Dissolve the partnership and cancel its VAT registration. (or need de-register 1st)?
Sole trader, ie husband starts trade, does he need to VAT register from go or await the VAT threshold being reached?
I understand the sleeping partner and de-registering the Pship VAT, but need to go through all options to discuss with client.
"Dissolve the partnership and cancel its VAT registration. (or need de-register 1st)?"
Deregister first because if you dissolve first HMRC might argue TOGC and that sole trader should therefore be registered from day 1.
"Sole trader, ie husband starts trade, does he need to VAT register from go or await the VAT threshold being reached?"
If sole trader takes over an existing VAT registered business, it is TOGC and sole trader would have to register from go. But if sole trader takes over a business that is not VAT registered at the time of take over, sole trader does not need to register for VAT and can wait until reaches the VAT registration turnover threshold.
