Does becoming a limited company reset the VAT threshold?

Do I need to register for VAT if I create a limited company after my Sole trader? This is question we get asked all the time and its surprisingly complex. The headline answer is, Yes, under certain circumstances by setting up a limited company you reset your VAT threshold for sole trades.

Read below to learn in what circumstances.

Most ecommerce businesses start as sole traders and by the time they are about to hit £85,000 want to change to a limited company. VAT can be scary and many people look at ways to delay VAT registration. 

You can delay VAT registration if you register for a limited company before you hit £85,000 turnover. This means that your VAT threshold resets to zero and you can build up £85,000 of sales in a 12 month rolling period before you have to register.

 

 

TOGC and VAT Registration

The process of transferring your sole trade to a limited company is known as a transfer of a going concern (TOGC).

When you create your limited company you have created two legal entities, the sole trader and the limited company. When you transfer the trade/business to another entity this is subject to TOGC rules.

HMRC guidance states that you need to be a taxable person (registered for VAT or require registration for VAT) to transfer your VAT threshold to a new company. Therefore, if you are not VAT registered and do not need to register for VAT (less than £85,000 revenue) then your VAT threshold resets.

See guidance.

Example, you set up an eBay Business and you have sole £75,000 worth of items in a 12 month period. You are not a taxable person because you are not VAT registered and you have not breached the threshold of £85,000. 

If you were to set up a limited company before you hit £85,000 your VAT threshold will reset to zero.

What if I am already registered for VAT as a sole trade or breached the £85,000 threshold

Under these same rules, someone who is already registered for VAT or breached the threshold can create a limited company but they would have to register for VAT on day one of the limited company. This is because they would be classified as a taxable person as per the TOGC rules.

This is even the case if you are not VAT registered but have made sales of over £85,000, in this case you should have registered.

Example, you are selling on Amazon and you have sold £87,000 worth of items. You look for a way to delay your VAT threshold. 

In this case as you are already over the threshold you are REQUIRED to register for VAT even if you incorporate as a limited company.

You cannot do this more than once – or HMRC will hit you with anti avoidance penalties

 

Want to chat about this further? Book a call with Your Ecommerce Accountant today!

 

The things we’ve discussed in this guide may sound daunting but you don’t have to learn all the ins and outs of rules and regulations. With an accountant in your corner, you only need to know the basics, and you have an expert on hand whenever you feel confused.

Many accountants will understand the issues in this guide, but specialist ecommerce accountants will mean everything runs smoothly and efficiently. If you want to fulfil your entrepreneurial dreams with an ecommerce business and need help with the accountancy side, please get in touch today.

Ben Sztejka ACA

Ben Sztejka ACA

I am an ICAEW Chartered Accountant with one core belief, make accounting as pain free as possible and focus on adding value to businesses.

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