FRS and transferring your VAT number

VAT Question

Q: My client is a VAT registered sole proprietor who has been operating under the Flat Rate Scheme (FRS). His turnover is now around £200,000, and he has formed a new Ltd Co and transferred his business into that Ltd Co. This was treated as a transfer of a business as a going concern, and my client wants to retain the sole proprietor VAT number and continue to use FRS in the Ltd Co. However, when we tick the relevant FRS box on the VAT registration application, the system is telling us that the client is not eligible as his turnover is over the £150,000 FRS entry threshold. Is the client not allowed to continue to use FRS if the VAT number from the sole proprietor is transferred to the Ltd Co?

VAT Answer

A: Unfortunately, the simple answer to the question is ‘No’.

While the transfer of a VAT number means that the new entity taking over the VAT number takes over the responsibility for the debts and liabilities of the previous entity, the use of schemes by the previous entity, or other issues, such as an Options to Tax made by the previous entity, do not transfer to the new entity with the VAT number.

This is because, under the relevant VAT legislation, the VAT registration of the new entity is treated as a new registration, even though the VAT number allocated to this new registration is that previously used by the previous entity.

As such, the new entity must make a new application for a scheme such as FRS, and, as this is a new application, entry is based on the turnover at the time of the new application; the fact that the previous entity was using FRS doesn’t alter this.

Therefore, as the Ltd Co’s turnover is over the £150,000 entry threshold, the Ltd Co is not eligible to join FRS.