Changing from a sole trade to a company and VAT

Normally a business can recover VAT incurred on their expenses incurred prior to VAT registration subject to two key rules:

1. in the case of goods (either stock for resale or fixed assets), the goods remain “on hand” at the date of registration and will be used in the newly registered business
2. in the case of services, the supply was made not more than six months before the date of registration. Six months represents a period in which it is deemed that services obtained will relate to business activity carried on at the time of registration.

The VAT would also need to be incurred by the same business that is now registered for VAT.

However, there is a specific exception for sole traders becoming limited companies. Once formed, your company should be able to claim VAT on goods and services if they relate directly to the business that it intends to carry on.

The six-month limit in respect of services and the four-year limit for goods also apply to pre-incorporation claims. It can also only be claimed to the extent that, at the time the tax was incurred, the relevant goods and services were used, or to be used, to make taxable supplies. So for example, you could not recover the VAT on a van that was purchased when the trade didn’t even exist.

If you would like any assistance with managing your VAT or company affairs, please contact your local TaxAssist Accountants.

Date published 7 Oct 2016

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.