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The motive for incorporating a business, that is working through a company instead of being self-employed or in partnership, is often to reduce tax on profits and allow for more flexible tax planning. VAT doesn’t usually figure in the decision as the rules work similarly whatever the business structure. However, VAT issues do arise from the transfer itself and overlooking them can cost you.
Where an unincorporated business transferred to a company, the transaction is known as “transfer of a going concern” also known as TOGC, which is outside the scope of VAT. This means no VAT is chargeable even if the company pays the sole trader or partnership for its assets.
There are exceptions to TOGC rule; it won’t apply if the sole trader or partnership is VAT registered but the company isn’t and isn’t required to be. Failing to meet registration condition would mean that sole trader or partnership would have to charge the company VAT on the value of all assets it transfers to it.
To avoid the trap make sure the company is registered as an intending trader before the transfer takes place, or has applied to HMRC for registration to take effect from that date.
If your unincorporated business isn’t VAT registered, but will be after it has been transferred to a company, even if that’s months or years later, you need to take steps to avoid potentially losing out on reclaiming VAT. A company can’t reclaim VAT paid on purchases made by the predecessor.
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