Does changing legal entity ‘reset’ the registration limit to zero?

I was asked recently whether the registration limit for the VAT could be “reset” if a sole trader transferred the business to a limited company. As a sole trader business is reaching the registration limit and the proprietor wanted to avoid being VAT registered.

I’ve come across this before under the rules for the transfer of business as a going concern (TOGC). this is essentially what is proposed in this situation, although as the sole trader’s turnover was below the registration limit, it’s likely they were unaware of the TOGC rules. The rules require the transferee, in this case the company, to take into account the turnover of the transferor’s business, the sole trader’s in this case, when considering when the company would have to be VAT registered.

Example

If the sole trader’s turnover in the previous 12 months was £80,000 made up like this:

Month Turnover Total
1 4,000
2 4,500 8,500
3 4,500 13,000
4 5,000 18,000
5 5,500 23,500
6 5,000 28,500
7 6,000 34,500
8 7,000 41,500
9 8,000 49,500
10 9,000 58,500
11 10,000 68,500
12 11,500 80,000

And the company’s turnover is £11,000 in its first month of trading the turnover for VAT registration will be £80,000 – £4,000 + £11,000 = £87,000. The company has to notify HMRC within 30 days and will be VAT registered from the first day of its third month of trading.

For convenience it is being assumed that the transfer takes place on the first day of the month.

If the company’s first month of trading was August, it would have to notify HMRC no later than 30 September. Its VAT registration would start on 1 October.

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