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When Is A Business Not A Business?

When it no longer qualifies for VAT registration ...

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Posted by Roger Eddowes on 15/11/2021 @ 8:00AM

It is an accepted fact that a business must have regular transactions to be VAT registered and therefore eligible to recover VAT on their costs. HMRC has been reviewing this in light of some recent tribunal cases ...

Be careful with any dormant business as HMRC may soon look into your VAT registration!

Be careful with any dormant business as HMRC may soon look into your VAT registration!

copyright: bowie15 / 123rf

A limited company called Babylon Farm Limited was set up to undertake certain farming activities alongside the director's main farming business and had been VAT registered since 1991. The directors also owned a number of other non-farming businesses, all run via separate limited companies.

"HMRC looked into the company in 2018!"

They only had one activity at the time, and that was cutting and baling hay which it then sold exclusively to the main director for use in another business. Income was only £440 per year; however, the company claimed input VAT of £19,000 for building a barn to house its equipment.

HMRC decided that Babylon Farm Limited no longer had enough business activity and disallowed the VAT recovery. This decision has now been supported on appeal by the Upper Tribunal.

There were a number of reasons for the tribunal to side with HMRC, including the company having no staff, no insurance and no evidence to prove it owned the hay it was selling to the director's main business as the land already belonged to him, so how could they sell it to him? Other factors included a lack of invoicing and a disparity between the cost of a new barn and the VAT reclaimed on it.

So, what does this mean? Well, a small amount of regular taxable income may now not be enough to support a business's continued registration for VAT. If you have a business just ticking over while you concentrate on other things, you may want to speak to your accountant as HMRC wonder why it's earning so little and claiming so much.

"Of course, circumstances will vary from business to business!"

I'd suggest taking steps to review each of your businesses to ensure they still qualify for VAT registration. In light of the Babylon Farm case, I'd suggest you do this sooner rather than later, as you don't want HMRC to start a VAT investigation into your activities.

Until next time ...

Business Godparent


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About Roger Eddowes ...


Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.

Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.