A VAT registration loophole?

A VAT registration loophole?

A couple of years ago I wrote about whether transfering a business to a different legal entity, e.g. from a sole trader to a company, would reset to zero the turnover count towards the VAT registration limit. At that time my view was that the transfer of a business as a going concern rules prevented this. There were probably others who thought this way too.

I have since come to the conclusion that the law does effectively allow the turnover count to return to zero on the transfer of a business as a going concern. To be covered by the rules, the Value Added Tax Act 1994 s49, that require the turnover of the transferee to be counted towards the registration limit, the transferee has to be a ‘taxable person’. A ‘taxable person’ is defined in the Value Added Tax Act 1994 s3(1) as a person that is or is required to be registered for VAT.

In the rules on VAT registration, Value Added Tax Act 1994 Schedule 1 paragraph 1(2), there is confirmation that the transferee’s turnover is only taken into account when they are a taxable person. The aim of this legislation seems to be to prevent a part of a business being transferred so that VAT registration is avoided. Whereas a person that is outside the definition of a taxable person, that is approaching the VAT registration limit, can transfer the business to another legal entity and avoid having to register for VAT.

Whilst this is legal it does seem to me to be thwarting the intention of the legislation. It will come as no surprise to me if, in a future Finance Bill, there is legislation to prevent this happening.

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