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Watch the VAT trap when registering


If you, your partnership, or your limited company, register for VAT purposes, then the registration will apply to all income of the registered body. Care should always be taken and the full implications of registration considered.

For example assume you are self employed earning around £70,000 and have just exceeded the VAT threshold. You inherited your parents home when they passed away two years ago. You now rent out the property and make a reasonable return on it.

You are obliged to register for VAT purposes because your self employed income has exceeded the VAT threshold (currently 68,000). Unfortunately in this case you register YOU for VAT purposes and not your self employed business. In which case, the VAT rules would apply to all of your income and related expenses. If you registered a partnership or limited company for VAT purposes then the rules would apply to all income of that partnership or limited company respectively.

Renting residential property is exempt from VAT. Great you say we don’t have to charge VAT on the rent. The bad news is that you may need to restrict what input VAT you reclaim on your sole trader business as a result of the exempt rental income which you receive, using what are known as “partial exemption” rules. With careful planning there are a number of possible solutions to save VAT, including holding the property in partnership with your spouse, or transferring the sole trader business into a company to name a few. The exact solution will depend upon circumstances and how other taxes can be kept to a minimum.