A client of mine decided they wanted to incorporate a new limited company for thier business and subsequently registered it for VAT. They then have redirected the trade from their existing sole trader business to this new company.
The issue is that the sole trader business, which was not VAT registered, has had a few thousand pounds of goods run through it and he wants to reclaim the input VAT for these. His first approach has been to put these invoices through his company, which I have outright rejected of course, for many reasons.
However, I do feel somewhat sorry for him, as had he not incorporated and instead VAT registered his sole trader business, presumably he could have recovered his input VAT on these goods he still holds.
The alternative is he VAT registers the sole trader business as well but as he has siphoned trade to the new Ltd Co, this looks like avoidance to me.
Any suggestions? Thanks.
Replies (19)
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WHY HAVE YOU REJECTED IT OUTRIGHT AND WHAT SORT OF POTENTIAL INPUTS (SORRY SAT ON MY GLASSES AGAIN HENCE CAPS )
Well you said that the sole trader business had been redirected to the new limited company. You can claim inputs in certain circumstances upto 6 months before registration. I am not clear of the status of the soke trade its not registered for vat is it?
The goods are essentially fixed assets - equipment for running events for their entertainment business
Can’t the sole trade business sell them to the ltd, for maybe the gross amount that was paid?
Agree it’s not quite as good as claiming the vat from HMRC, but at least it’s drawing cash from the ltd ...
at least it’s drawing cash from the ltd ...
Taxable (to the extent that the assets have lost value in the meantime) as a distribution?
Not very specific but it sounds as though most if not all purchases were made quite some time before incorporation. As such, it would be difficult to argue that the individual had purchased the assets on behalf of the company especially if they have already been put to use in the sole trade. I see no scope for VAT recovery other than to register the sole trader. You don’t say how much is involved so hard to say if it would be worth the effort.
Kiss goodbye to the VAT. The minute you insert an unregistered trader into the chain, the VAT dies.
No reason why the company can't buy the goods from the sole trader at a fair valuation, though. In fact, that's exactly what they should do.
Kiss goodbye to the VAT. The minute you insert an unregistered trader into the chain, the VAT dies.
Unless the trader subsequently registers. In this case:
Trader registers with effect from day before transfer.
Recovers input VAT on assets acquired in previous 4 years and still held.
Transfers trade and assets to new company as a TOGC.
This does rely on HMRC accepting retrospective registration.
I assume WP is saying that the sole trader must register because the company can't recover input tax on supplies which weren't made to it even though they relate to the same business.
Not quite. Based on the information you've given I agree with WP that the transfer of the assets from the sole trader to the company would be part of a TOGC, part of which has already taken place, and therefore outside the scope of VAT.