If it is then the turnover of the sole trader business is considered when working out whether/when the business will need to register for VAT, by exceeding £90k of taxable turnover in a 12-month rolling period.
However, recently HMRC confirmed that where the sole trader is not, nor required to be, registered for VAT, the turnover effectively resets to zero when the legal entity changes. However, if the sole trader is already registered for VAT, or is required to be registered for VAT, then the previous turnover is included when the entity changes.
Therefore, it may be possible for some businesses to change their legal entity before they reach the VAT threshold to generate further income without a VAT registration. The steps to follow are below:
What is the VAT position of the current entity?
If the current entity is VAT registered – the new entity will be required to be VAT registered.
If the current entity is NOT VAT registered – the new entity is not required to be VAT registered.
When does the new entity need to be registered?
As you are aware the conditions for registering for VAT are as follows:
your total taxable turnover for the last 12 months goes over £90,000 (the VAT threshold)
you expect your taxable turnover to go over £90,000 in the next 30 days
If the previous entity isn’t registered for VAT, then the new entity only needs to be register for VAT when they meet the conditions. The key point here is the new entity does not take on the previous entity’s turnover as a going concern. It starts at £0 turnover from the point the new entity is created.
Whilst this may be welcome news for some small businesses, it is not recommended to look at replicating the change in legal entities upon periodically reaching the VAT threshold. HMRC have disaggregation and anti-avoidance provisions which could be subject to significant penalties and interest if HMRC deem the changes to be artificial.
Note that it is possible to voluntarily register for VAT where a business has taxable supplies.