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Repeated change of legal entity

21st Jul 2020
VAT Consultant vatadvice.org
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There is often discussion on these pages about changes in legal entity before a business becomes registered for VAT.

Regular readers will know my view that a change in legal entity, for example, from sole trader to limited company, re-sets the taxable turnover calculation for VAT registration purposes. But it also denies the limited company credit for VAT incurred by the sole trader, so it can’t be claimed on the first VAT Return as pre-registration input tax.

Which brings me to the specific question that I have come across; “Can I repeatedly change legal entity, resetting the taxable turnover each time, so as to avoid registration for VAT?

No.

I think a single change in legal entity for a genuine reason e.g: direct tax, or exposure to personal liability, is reasonable.

But, where there is clearly an avoidance motive, as my question indicates, that is quite different.

Indeed, VAT legislation and HMRC guidance considers this specific situation. The wording of VAT Act 1994, Sch 1, para 2 refers to the terms under which HMRC can issue a formal Notice to aggregate the taxable turnover of more than one legal entity.

2)     The Commissioners shall not make a direction under this paragraph naming any person unless they are satisfied—

(a)     that he is making or has made taxable supplies; and

(b)     that the activities in the course of which he makes or made those taxable supplies form only part of certain activities …, the other activities being carried on concurrently or previously (or both) by one or more other persons; and

(c)     that, if all the taxable supplies the business described in the direction were taken into account, a person carrying on that business would at the time of the direction be liable to be registered by virtue of paragraph 1 above; …

In their internal guidance, HMRC call this ‘temporal disaggregation.’ This is the link:

https://www.gov.uk/hmrc-internal-manuals/vat-single-entity-and-disaggregation-manual/vatdsag05100

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