Newsletter Summer 2016

VAT trap when changing business

Businesses evolve and grow. What starts with one man in a garage can grow into a multi-national enterprise. Along the way the business will operate through different legal structures; from sole trader to partnership, single company to a group of companies.

At each of those transitions HMRC should be informed, as different tax rules will apply to the new entity. This is particularly important for VAT, as the VAT registration number doesn’t automatically transfer, and the new business structure may receive a penalty for not applying for a new VAT registration.

This can be a problem when an individual takes their son, daughter or spouse into the business, and the sole trader suddenly becomes a partnership. HMRC will see the new partnership as a completely separate entity, although in reality the business has been transferred as a going concern from the hands of the sole trader into the partnership.

The new partnership needs to register for VAT immediately, and it can apply to have the VAT number transferred from the sole-trader business. HMRC will also have to be informed of the details of all the partners.

The transfer of the VAT number is not always a good idea, but it can make life easier where there are on-going contracts which are taken on by the new partnership. We can help you avoid those little VAT-traps, if you let us know what has changed in your business.