VAT registration pros and cons

VAT registration pros and cons

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I have a new client who wants to start trading as a sole trader selling pies. He is thinking of converting his garage to a kitchen and thinks it may be beneficial to get VAT registered to reclaim the VAT on the conversion. Can anybody help by discussing the pros and cons to this idea?

If he is selling hot food, will he have to charge VAT anyway so VAT registration may help him get the VAT back and won't affect his selling price as VAT may already be included? Any ways around charging VAT on the pies?

Other issues might be the PPR problems when he sells his house (unless the trade has stopped by then?) and also of course business rates/insurance

If anyone can add anything I would appreciate it!

Replies (3)

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chips_at_mattersey
By Les Howard
20th Sep 2012 20:15

Hot food

The first issue is whether the client should register for VAT while his turnover is less than the threshold, £77,000. I suspect the customers will be private persons, hence it would be in his interest not to register until he has to.

If he does register for VAT, and recover input tax on start up costs, he will have to charge VAT on his sales - Budget changes mean that, from 1 October 2012, all such sales will be standard rated, but check the guidance to make sure: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.por...

One of the disadvantages of VAT registration is that there is little VAT to reclaim, once the initial costs are recovered, since almost all purchases will be zero rated.

But do the sums, anyway.

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By Mouse007
20th Sep 2012 20:31

wait

until turnover exceeds VAT registration threshold

Save VAT on £77,000 of turnover = £12,833

When turnover exceeds £77,000 register and claim VAT on assets and stock held at date of registration

 

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Replying to Vince54:
avatar
By spidersong
20th Sep 2012 21:30

Some further food for thought...

Mouse007 wrote:

until turnover exceeds VAT registration threshold

Save VAT on £77,000 of turnover = £12,833

When turnover exceeds £77,000 register and claim VAT on assets and stock held at date of registration

 

But do bear in mind that if you're more than six month down the line the assets you can recover will not be the cost of converting the house. Converting the house is a building service and so will only be covered by the limits on services which are six months back from registration.

What you could do is register, recover the VAT on the service of converting the house, and then (if turnover is below £75,000) in short order deregister. When deregistering you may have to declare VAT on the current value of any assets on hand, essentially the VAT registered business is treated as supplying the goods to the non-VAT registered business going forward, however since the converted property is exempt from VAT there would be no VAT due on this. So it may be possible to register. claim back VAT, trade for a short while as registered and then deregister with no significant liability, but a healthy recovery. Also bear in mind that the bar on recovery of purchases under the flat rate scheme only relates to purchases after registration, and so pre-reg expenses if you register once conversions complete will still be recoverable but you may be able to reduce the VAT payable.

But this would depend on a number of factors such as how the property work is being done, whether items are fixtures or moveable equipment, if the cost of converting exceeds the Capital Goods Scheme threshold, whether the flat rate precentage gives a good return for the client etc. and so you may be best advised to talk to a VAT specialist before going ahead with registration on this basis.

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