VAT Issues on Incorporation

VAT issues on incorporation

For an overview of the tax issues generally on incorporation then please see here.

Introduction

As is the case with many transactions, VAT is often the tax that is overlooked on an incorporation. This can be an expensive oversight!

VAT position of the original business

If the original business is not registered for VAT purposes then there should be not really be any VAT issues on incorporation.

If the original business is registered for VAT then the decision will depend on:

  1. Whether the original business has mandatorily registered for VAT (Ie its turnover exceeded the VAT threshold); or
  2. Whether the original business has voluntarily registered for VAT.

In the case of the former, the company must register for VAT straight away.

In the case of the latter situation, the company can make up its own mind whether it is a good idea to register for VAT or otherwise.

Importantly, if it does not register immediately, when it is checking its own turnover against the thresholds it must take in to account the turnover of the business it has succeeded.

Transfer of a Going Concern (“TOGC”)

Where the transfer of the business to the Company satisfies the requirements of a TOGC then the transfer of that business should be outside the scope of TOGC.

Where there is a commercial property that is part of the transaction and there is an option to tax (sometimes referred to as an ‘election to tax’) running with the property then the Company will also likely need to ‘opt to tax’ in order to be able to rely on the TOGC status.

VAT and property on incorporation

Where an Option to Tax runs with the property or land then a change in business activity might prevent a TOGC. Consequently, this will mean that VAT will be charged on the transfer of the property.

As stated above, the transferee Company must also opt to tax in order for the transfer to qualify as a TOGC.

One must also be aware of the Capital Goods Scheme. This can result in a clawback of VAT for the transferor where certain conditions are met:

  1. VAT was recovered on a commercial property on:
    1. Purchase;
    2. Refurbishment; or
    3. construction
  2. There is no option to tax in play; and
  3. The items of expenditure referred to under (1) cost more than £250,000 (excl VAT).

Where the Capital Goods Scheme applies then the transferor may have to pay VAT on the market value of the property if:

  1. The property is kept by the transferor;
  2. There is an option to tax on the property; and
  3. The transferor will be de-registerfrom VAT.

Transfer of VAT number

Generally speaking, a business will not seek to transfer the VAT number of the transferee business. However, It is possible to transfer the existing VAT number to the new company if this is desirable.

As one might expect, the company will remain liable for any outstanding output VAT from the last three years incurred by the transferee business, whereas the transferee business remains liable for Input VAT.

For the tax treatment of capital assets on the transfer of a business to a Company then please see here.

If you have any queries around VAT on incorporation or VAT issues more generally then please get in touch.

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