Voluntarily VAT registration - Sole Trader or a Ltd Company

[zaibzonline]

Hi everyone!

I have a few questions regarding VAT and whether to register as a sole trader or a limited company. Pardon my naivety!

I'm a part time car trader working from home. I buy from auctions as a Sole Trader until recently one of the auctions that I use has requested to be VAT registered as a requirement. My turnover is below the VAT threshold so there is no need for me to register, however, this being my most preferred auction I'll now have to register.


I have some concerns regarding registering for VAT as a limited company or a sole trader. I see pros and cons in both the structures but not sure which one would benefit in the long run. Please provide your opinion and advice:-

- If I register as a sole trader and later decide to close the business (since this is my part time business and I have got a part time job and another business), would I need to inform HMRC about it to remove me from their register? How does this work?
- Out of sole trader and a limited company, which one is the better option in terms of VAT registered business?
- In order to obtain mortgage, loans etc. is it better to register as a sole trader at this stage since banks only count individual's credit rating and your company's financial status is of no use even if you are the sole owner of the business.
- And lastly, sole trader keeps the paper work limited as compared to limited companies.


And how are HMRC treating voluntarily VAT applications these days i.e. timeframe, prerequisites etc. Is it easy to register voluntarily, especially for a brand new limited company?

Many thanks for your time and input.

Cheers!

[spidersong]

You'll have to pardon me, just passing through, so no full answer at this stage, but:

"I have got a part time job and another business", what's the other business; sole prop, partnership, limited? and is it in a similar sort of trade?

If you register as a sole prop, then VAT applies across all businesses you run as a sole prop, so if you've already got a sole prop, then your only options may be limited or partnership, unless you change the entity running that other business.

also if you've been running both as a sole prop already are you happy that their joint turnover hasn't breached the registration limit?

[Generix]

I answer your questions out of order:

(1) Voluntary registrations, so long as you have decent evidence of your intention to make taxable supplies, then there should be no issue.

(2) As a small trader/ trader in 2nd hand motor vehicles, you may opt to use the flat rate, cash accounting or more likely the second hand margin scheme. If you opt for the latter record keeping and documentation is VERY VERY important, more so than the former two options, as you effectively pay VAT on the 'profit' rather than the net value (I have simplified the description [before the other tax experts pull me up on it]) of the sale. Keep this in mind. For VAT purposes record keeping is same for Ltd / Sole prop, don't know about accounts etc.

(3) If you register as a sole trader for VAT then all of your business as a sole trader is caught under the VAT rules***, including your other part-time business income (unless you are an employee for the other business - i.e. the business is not yours). I'll leave others to mention about things like registering for self employment and business tax etc.

(4) Practically and administratively there is no difference in deregistering for VAT as a Ltd Co to a sole trader, same for registering.

(5) To be honest with regard to credit, it depends on how much cash you have, turnover, and what you are willing to guarantee, so sometimes these days, directors of Ltd co's end up risking as much (in practical terms) as they would otherwise as a sole trader...all depends who you go to for credit and what your current finances are like.


***Note that I mean any business you run as a sole trader would be caught, even if they are seperate businesses. Also if you register one business as a Ltd Co, and keep the other going as sole trader, then HMRC might consider whether you are attempting to segregate the businesses for VAT avoidance purposes, usually this is only if the businesses are somehow related: obvious example to make the point is a pub seperating the business of selling beer and selling food.

[zaibzonline]

"I have got a part time job and another business", what's the other business; sole prop, partnership, limited? and is it in a similar sort of trade?

If you register as a sole prop, then VAT applies across all businesses you run as a sole prop, so if you've already got a sole prop, then your only options may be limited or partnership, unless you change the entity running that other business.

also if you've been running both as a sole prop already are you happy that their joint turnover hasn't breached the registration limit?

Thanks for your input.

My other business is a limited company and is entirely different sector. And with regards to turnover, well the other business is a startup so at the moment its eating up my savings.

I take it in this scenario I can register as either and it won't make any difference i.e. they can't relate turnover of a limited company (sole director) and a Sole Trader as long as the sectors are different; and for two separate limited companies (of course in separate sectors) run by the same director, the threshold can still not be related since limited companies, right?

[zaibzonline]

I answer your questions out of order:

(1) Voluntary registrations, so long as you have decent evidence of your intention to make taxable supplies, then there should be no issue.

(2) As a small trader/ trader in 2nd hand motor vehicles, you may opt to use the flat rate, cash accounting or more likely the second hand margin scheme. If you opt for the latter record keeping and documentation is VERY VERY important, more so than the former two options, as you effectively pay VAT on the 'profit' rather than the net value (I have simplified the description [before the other tax experts pull me up on it]) of the sale. Keep this in mind. For VAT purposes record keeping is same for Ltd / Sole prop, don't know about accounts etc.

(3) If you register as a sole trader for VAT then all of your business as a sole trader is caught under the VAT rules***, including your other part-time business income (unless you are an employee for the other business - i.e. the business is not yours). I'll leave others to mention about things like registering for self employment and business tax etc.

(4) Practically and administratively there is no difference in deregistering for VAT as a Ltd Co to a sole trader, same for registering.

(5) To be honest with regard to credit, it depends on how much cash you have, turnover, and what you are willing to guarantee, so sometimes these days, directors of Ltd co's end up risking as much (in practical terms) as they would otherwise as a sole trader...all depends who you go to for credit and what your current finances are like.


***Note that I mean any business you run as a sole trader would be caught, even if they are seperate businesses. Also if you register one business as a Ltd Co, and keep the other going as sole trader, then HMRC might consider whether you are attempting to segregate the businesses for VAT avoidance purposes, usually this is only if the businesses are somehow related: obvious example to make the point is a pub seperating the business of selling beer and selling food.

Thanks Generix for your time.

(1) And how long does it normally take for the process? I heard around 4 weeks time, is that correct?

With regards to point (3) I've already described in the other reply the other business is a limited company in an entirely different sector - is a startup so no worries about turnover as yet.

My other concern is if I register a limited company and later decide close the business (when my other business picks up and/or I decide to quit car trading) it will leave a footprint on my credit profile won't it? Does such a record affect the credit worthiness and/or reputation in any way?

And one major concern, I've seen it happening to many even in my family that the accountant did not file the VAT returns correctly as a result of which HMRC dissolved the company. What happens in case of a Sole Trader? They can't dissolve a sole trader can they so how could they penalise him?

[Generix]

I answer your questions out of order:

(1) Voluntary registrations, so long as you have decent evidence of your intention to make taxable supplies, then there should be no issue.

(2) As a small trader/ trader in 2nd hand motor vehicles, you may opt to use the flat rate, cash accounting or more likely the second hand margin scheme. If you opt for the latter record keeping and documentation is VERY VERY important, more so than the former two options, as you effectively pay VAT on the 'profit' rather than the net value (I have simplified the description [before the other tax experts pull me up on it]) of the sale. Keep this in mind. For VAT purposes record keeping is same for Ltd / Sole prop, don't know about accounts etc.

(3) If you register as a sole trader for VAT then all of your business as a sole trader is caught under the VAT rules***, including your other part-time business income (unless you are an employee for the other business - i.e. the business is not yours). I'll leave others to mention about things like registering for self employment and business tax etc.

(4) Practically and administratively there is no difference in deregistering for VAT as a Ltd Co to a sole trader, same for registering.

(5) To be honest with regard to credit, it depends on how much cash you have, turnover, and what you are willing to guarantee, so sometimes these days, directors of Ltd co's end up risking as much (in practical terms) as they would otherwise as a sole trader...all depends who you go to for credit and what your current finances are like.


***Note that I mean any business you run as a sole trader would be caught, even if they are seperate businesses. Also if you register one business as a Ltd Co, and keep the other going as sole trader, then HMRC might consider whether you are attempting to segregate the businesses for VAT avoidance purposes, usually this is only if the businesses are somehow related: obvious example to make the point is a pub seperating the business of selling beer and selling food.

Thanks Generix for your time.

(1) And how long does it normally take for the process? I heard around 4 weeks time, is that correct?

With regards to point (3) I've already described in the other reply the other business is a limited company in an entirely different sector - is a startup so no worries about turnover as yet.

My other concern is if I register a limited company and later decide close the business (when my other business picks up and/or I decide to quit car trading) it will leave a footprint on my credit profile won't it? Does such a record affect the credit worthiness and/or reputation in any way?

And one major concern, I've seen it happening to many even in my family that the accountant did not file the VAT returns correctly as a result of which HMRC dissolved the company. What happens in case of a Sole Trader? They can't dissolve a sole trader can they so how could they penalise him?

Re your last point - you must know some people with terribad accountants then am sure there are people (within this forum or who advertise on this website that that can help you with the accounting/VAT returns).
To answer your question, in very simplified terms if HMRC are owed money from a Ltd Co, they will take whatever money /assets is within the Ltd co, and in theory any directors assets etc are safe (except any invested income obviously). If HMRC are owed money by a sole trader, then they will take the sole traders assets/cash (e.g. including house etc). It doesn't very often come to this kind of serious situation though.

re (1) haven't done a VAT reg in a while, but assuming no questions from HMRC or only basic ones then 1 month sounds ok.

re credit, I have no idea. I would assume with regards to Ltd co.s their respective credit limits are looked at on a case by case basis, based on assets, business plan and other common factors for granting credit. Not my area of expertise though.