Multiple voluntary VAT registration - The Book-keepers Forum (UK)

johnriley · Newbie

Multiple voluntary VAT registration

RobH · Expert

Hi John,

yes you can apply for vat registration on all three, however there are a number of questions that are asked and of course hmrc may decline the registration.

I do wonder if you are making a rod for your own back though in setting up three companies, have you taken advice?

Rob

johnriley · Newbie

Thanks Rob,

Yes I've run alot of companies before and this setup is to explore three completely different technologies.

My concern was about whether its legal to apply for VAT registration on a company purely to reclaim VAT on startup costs, even if there are no sales at all?

John

RobH · Expert

Hi John,

I have known for hmrc to ask to see confirmed orders for services in the past before allowing a vat registration when no taxable supplies have been made, however it is perfectly acceptable for businesses that are intending to trade to be able to claim input tax on setup costs.

There are possible implications for having group companies with regard to corporation tax (though profits need to be reasonably high) in that the lower rate of ct will divided evenly between all companies, theerfore if you have a couple of loss making co's then you could potentially be wasting the threshold. Also there will be associated costs with each company. However I'm sure you know what you are doing!

Rob

Shamus · Forum Moderator & Expert

Hi John,

some sound advice as always from Rob there in his last message.

On a related matter John as this is research and development take a look at the capitalisation criteria for SSAP13 as it might help out your tax planning.

You're going to need to ensure that the entities are completely separate. For example, entity B should not be using equipment purchased by entity A. etc.

I would strongly advise getting a good accountant on board early with this as it may save you a lot of grief later.

When it comes to group accounts and advice on R&D capitalisation you might be as well also posting your questions on Accounting Webb which is a similar sight to this but aimed at accountants rather than bookkeepers.

It's an unfortunate fact that advice on here is often based on common sense assumptions and I'm sure with your previous experience you already know that the UK tax and financial reporting systems have very little to do with common sense.

I'm not trying to be unwelcoming to this site you understand and I really wish you all the best in your endevours. I just really think that you might be better off talking to accountants than bookkeepers.

Kind regards,

Shaun.

Rhianrach · Expert

Two more well worded answers, Shaun and Rob normally write speeches for MP's as you can see.

It's an interesting thread for someone like me as I always thought the HMRC would or will see a company that has no intention of making money but claiming its losses as fraudulant.

It's always good to see the more informed answers. smile

Shamus · Forum Moderator & Expert

Hi Steve,

the fact is that lots of companies start from an idea. with many the idea withers and dies but for a few a real gem flourishes and becomes a substantial business.

The UK tax system does seem geared more towards crushing any entrepreneurial spirit but I think that just makes our successful entrepreneurs that little bit stronger.

With all three of the businesses John's intention is to make a profit but the reality is that he appreciates that they may not and he is willing to risk his personal investment on that basis.

If one does flourish then his obvious hope is that it will recoup more than his losses on the failed ventures.

It is part of the fiduciary duty of a director that they must act in the best interests of the company with a view to making a profit.

John as an owner director will be even more attuned to his fiduciary duty of care as it's his own money that's at risk.

personally I'm too much of a control freak to allow a company to fail even if it's having problems. It seems tantamount to having several children and only allowing the strongest one to survive.

However, this is a perfectly acceptable business model... Just hope that at least one of John's ships sails.

Right, back to the speech writing.... I think that old Gordon could do with a good speech writer at the moment but the only speech that I would write for him would be one of resignation! ("Your going down Brown!").

Talk in a bit,

Shaun.

Rhianrach · Expert

Shamus wrote:

Hi Steve,

the fact is that lots of companies start from an idea. with many the idea withers and dies but for a few a real gem flourishes and becomes a substantial business.

The UK tax system does seem geared more towards crushing any entrepreneurial spirit but I think that just makes our successful entrepreneurs that little bit stronger.

With all three of the businesses John's intention is to make a profit but the reality is that he appreciates that they may not and he is willing to risk his personal investment on that basis.

If one does flourish then his obvious hope is that it will recoup more than his losses on the failed ventures.

It is part of the fiduciary duty of a director that they must act in the best interests of the company with a view to making a profit.

John as an owner director will be even more attuned to his fiduciary duty of care as it's his own money that's at risk.

personally I'm too much of a control freak to allow a company to fail even if it's having problems. It seems tantamount to having several children and only allowing the strongest one to survive.

However, this is a perfectly acceptable business model... Just hope that at least one of John's ships sails.

Right, back to the speech writing.... I think that old Gordon could do with a good speech writer at the moment but the only speech that I would write for him would be one of resignation! ("Your going down Brown!").

Talk in a bit,

Shaun.

I take it you watched the debate then, " You've had 13 years to implement that" seemed to crop up a lot. Resignation is something that Mr Brown will probabaly be "resigned" to.

I'll stick to my protest vote for now.

As for the rest of your post yeah I see your point, entrepreneurial spirit is something I often overlook in favour of sound business plans, but hey if I thought just throwing ideas out there and seeing how they panned out was a good thing then I would be voting Labour/Libdem/Conservative. biggrin

Shamus · Forum Moderator & Expert

Hi Steve,

Although seldom bedfellows I don't think that entrepreneurial spirit and sound business acumen necessarily have to be divorced concepts.

I think that we can all agree that (the great) Theo Paphitis is an entrepeneur but he's built his fortune on sound and well grounded business knowledge.

Continuing that example not all of the companies that he invests in have become the successes that he would want them to be but he continues to invest in new enterprises on the grounds that the money invested in the failures will be outweighed by the successes.

Actually the only failure that I can think of was the one where he jumped on the green bandwagon and invested in trucks using Biofuels. Nothing against going green but I think that for something like that the extended infrastructure needs to preceed it.

In the same way, each of John's companies could become a success but he is just approaching the enterprise from the realistic perspective that only one will.

Actually, on his point, have you come across the BCG matrix yet in your studies? It divides interests up into cash cows, star's, dog's and question marks and helps one decide which companies to invest in, which to divest oneself of and which will pay the bills whilst growing others. The whole concept is based on the fact that some products and services and indeed companies will succeed and others will not. And successful businesses will have a good mix of the various types of company / product / service.

Also fit's in with the product life cycle and Ansoff's and Porters management theories. If you get a chance this area makes pretty good reading... I'm off piste again. Sorry. I'll post this before it ends up an essay!

talk later,

Shaun.

johnriley · Newbie

Thanks for all your replies, very helpful.

I've take this approach before and seen that realistically when you start out with several really advanced technology ideas, one will come out on top.

Not knowing which one that will be until after the initial R&D is just part of the process for me.

But I'd still intend to register for each company in order to claim back the VAT on all expenses I undertake in the process.

Cheers
John

Rhianrach · Expert

Shamus wrote:

Hi Steve,

Although seldom bedfellows I don't think that entrepreneurial spirit and sound business acumen necessarily have to be divorced concepts.

I think that we can all agree that (the great) Theo Paphitis is an entrepeneur but he's built his fortune on sound and well grounded business knowledge.

Continuing that example not all of the companies that he invests in have become the successes that he would want them to be but he continues to invest in new enterprises on the grounds that the money invested in the failures will be outweighed by the successes.

Actually the only failure that I can think of was the one where he jumped on the green bandwagon and invested in trucks using Biofuels. Nothing against going green but I think that for something like that the extended infrastructure needs to preceed it.

In the same way, each of John's companies could become a success but he is just approaching the enterprise from the realistic perspective that only one will.

Actually, on his point, have you come across the BCG matrix yet in your studies? It divides interests up into cash cows, star's, dog's and question marks and helps one decide which companies to invest in, which to divest oneself of and which will pay the bills whilst growing others. The whole concept is based on the fact that some products and services and indeed companies will succeed and others will not. And successful businesses will have a good mix of the various types of company / product / service.

Also fit's in with the product life cycle and Ansoff's and Porters management theories. If you get a chance this area makes pretty good reading... I'm off piste again. Sorry. I'll post this before it ends up an essay!

talk later,

Shaun.

Skibbins is a word i often use, it actually has a very useful meaning.

I'l take from your answer that it is indeed the best way of doing things, however I still don't see the point of having three different companies when you could have one with three different projects.

Skibbins smile

Shamus · Forum Moderator & Expert

Everyone does things differently.

Having three companies can either simplify matters or complicate them horrifically.

Imagine a scenario where all three companies are successful but John only has the time to devote to one.

Having three companies makes it easy to sell off two of them leaving the third to concentrate his efforts on.

Now imagine the problem where all three companies need to use the same piece of equipment. Who suffers the hit on the VAT? Hire costs would be internal to the group so are not a real expense when calculating profit or loss!

There are lots of other plus and minus points but for now that should suffice.

It's really up to the business owner with sound advice from their accountant to determine the best approach to take when setting up one company or several.

Whatever the approach taken there will be benefits and consequences. It's just down to John to take them all into consideration and weigh up the optimal approach for his business.

Good luck to him.

Shaun.

P.S. Never heard of the word Skibbins and its not in the dictionary. Is it a coloquealism?

Rhianrach · Expert

P.S. Never heard of the word Skibbins and its not in the dictionary. Is it a coloquealism?

If by coloquealism you mean made up word then yeah. smile

It is an all encompassing word that means generally fair enough.

So skibbins, just trying to understand Johns motives for three seperate companies, always open to different ideas.

Shamus · Forum Moderator & Expert

Evening Rob,

just saw you post on the other thread but wanted to talk some more about this one.

Does the way that I think about the multi company option make sense to you?

Personally I see nothing amiss with John's approach. It's not the one that I would take because I couldn't face the thought of two failures but that's just personal preference and in essence the business model seems fine to me.

Shaun.

RobH · Expert

Hi Shaun,

I don't have a problem with the approach however I have had a spate of clients wanting to set up multiple companies reecently, with holding companies etc. In all of these it would in my opinion not have been of any benefit to the client however for me there was more charges to make. There are possibilities of it being a very inefficient set up for tax purposes. I can see the point if there are different shareholders and I take your point about being able to offload the other companies, but there are always ways of doing that if that is what is needed.
If just the one company is created there will be no problems with recovering vat, there would be the potential to immediately offset losses of the other parts of the company against the profitable parts without diluting the lower ct rate, no need to do 3 lots of AR's, accounts, CT600s etc. No need to pay an accountant three times etc.

I like things simple but of course John is experienced and has his reasons.

I think you are absolutely right in directing him to Accountancy Web by the way.

Rob

-- Edited by RobH on Saturday 17th of April 2010 10:29:09 PM

Shamus · Forum Moderator & Expert

Cheers Rob,

always good to talk to you to bring balance to the discussion.

I think that I was particularly defensive of Johns method as Steve assumed fraud but the reality is that whilst it could be an engine to facilitate fraud it such does not necessarily follow and the reality is that this is a way that some people departmentalise the various divisions of their business.

I agree that from the financial reporting side this is a much more expensive option for John than the single entity arrangement and personally would only advise this sort of arrangement for businesses where there has been a serious rather than token investment in each of the group of companies.

Of course, what non of us looked at last night was that as these are R&D entities it may be that they are being created in order to attract separate grants and investment.

If that is the case then separate legal entities make sense but this opens up a whole new minefield as covered by SSAP4 which deals with grants.

In instances of proven fraud involving grants the easily lifted veil of incorporation is of little personal protection.

Anyway Rob, as we both touched on, this is accountants not bookkeepers territory and anything that we say here is only personal opinion and should not in any way constitute business advice to John.

Hope that you have a great day matey,

all the best,

Shaun.

Wella · Expert

Morning all

Not even going to attempt any advise on this subject but realised that there are lot more questions than answers in what appeared initialy a straight forward question and I am interested in the various options that are open and have some questions of my own.

As companies are expected to trade as a going concern, is there any conflict between the forming of a company with an expectation of failure and a directors fiduciary responsibilities?

Assuming that there would be some intangible assets held by the companies, what happens to ownership of, say a patent, copyright or intellectual property, if the entitiy that owns it no longer exists

I realise this is beyond the remit of this forum, just thought it might keep a debate going.

Bill

Shamus · Forum Moderator & Expert

Good call Bill,

I can't answer the latter point but I'll give my understanding of the first.

John has created these entities with a view to profit even though he realised that any or all of them may fall by the wayside. From that perspective each has been created with a view to profit even where no such profit materialises.

HMRC appreciate that most companies do not show a profit in there first three years of existance and that many fold during this time so the view to profit is really a view to eventual not immediate profit.

The key here is one of intent. There must be intention to make a profit regardless as to whether or not one actually materialises.

I don't think that there is any argument over the fact that John intends to make a profit but he seems to be a realist and realises that most if not all of his investments may fail.

I think that the major question to be considered here is which entity owns assets and which entity uses those assets.

Also the capitalisation criteria (per SSAP13) clearly state that to be recognised the project should :

Have a reasonable expectation of profit
Be commercially viable
Be clearly defined
Be adequately resourced to completion
Be separately identifiable
Be technically feasible

I'm sure that John knows all this though as he states that he has done this before so really this is just for the continued theoretical debate that the question has spawned.

Talk in a bit Bill,

Shaun.

Wella · Expert

Thought you might have a definitive answer on at least one of the points, cheers for that Shaun.

I am now even more curious as to what happens to intangible assets, when a company folds. I am guessing that John is perhaps retaining ownership and not transferring rights to the company.

In a case where a company fails, disposal of tangible assets is relatively easy insomuch as they can be sold off but I cannot imagine it can be that easy with intangibles, after all, who wants to own the patent on something that doesn't work (excepting that current technology prevents it from doing so). If it were a deceased individual that owned it I am guessing that it would transfer to the heirs but if a business entity ceases to exist?

Not going to mention intellectual property rights. Oops too late................

Looks like I'll be trawling the interweb to try and find an answer now and it's such a lovely day out

Shamus · Forum Moderator & Expert

Hi Bill,

I'm afraiid that I'm pretty useless on the second point but may be able to steer you in the right direction.

twice in the same thread I'm going to advise a look at accounting web.

I don't think that the powers that be will mind too much as the thread is really beyond our normal level of assistance and discussion of this site but still a useful discussion that wouldn't hurt for people to be aware of.

The following threads may not give the answers but should prompt further searches that will give the definitive answers that your looking for.

Have a glance at the treatment of brands (an intangible) in this thread :

http://www.accountingweb.co.uk/item/159175

Actually, you might also be interested in this thread on FRS18 :

http://www.accountingweb.co.uk/item/84315

And maybe also this one of securitising intangible assets :

http://www.accountingweb.co.uk/item/167958

I think that you may need to be a member to view some of the above but membership is free and you can hover invisibly without making any posting over there. (Advisable as they're not as friendly and welcoming as we are over here!).

I know that I'm going to regret sending you over there as it's a bit of a pandora's box which once opened you won't be able to close again.

Have fun Bill,

Shaun.

P.S. Everyone should read the thread on FRS18. It's the basis of our profession!

Wella · Expert

Always knew this would go beyond the scope (sounding like the VAT man now) of the forum. No worries, I am already signed up to accounting web, definately has interesting reading

Bill