Facial Aesthetics VAT Planning for Dentists
Here’s a helpful VAT planning tip for dentists who run a separate facial aesthetics business providing purely cosmetic treatments alongside their dentistry. If you haven’t registered for VAT yet and are concerned that registering and paying 20% VAT on your income could affect the fees you charge your patients and your overall profits, this advice is for you.
This VAT planning delays the need for compulsory VAT registration when sales exceed £90,000 in a rolling 12 months. It is commonly used in other industries, such as restaurants and driving schools, which face the challenge of selling their goods and services to the public, who cannot recover VAT.
Why Delay VAT Registration for Facial Aesthetics?
As your patients cannot recover VAT, charging VAT at 20% directly increases the cost to your customers or reduces your profits if you choose not to pass that cost on. This can make your treatment prices less competitive or profitable against someone who hasn’t registered for VAT.
Changing the Legal Entity to Delay VAT Registration and Maintain your Competitive Pricing
Businesses registered for VAT fall within the VAT rule known as the Transfer of a Business as a Going Concern (TOGC). The TOGC rules apply when a business is sold or transferred. A critical rule of TOGC is that the acquiring business must be registered for VAT at the time of the transfer or be in the process of registering for VAT. This requirement to be VAT registered from the first day prevents the new business from making any VAT-free sales before it exceeds the annual sales registration limit.
The absence of the TOGC rules for businesses not VAT registered means they can start as sole traders, then move to a partnership and later to a limited company (Ltd) or a Limited Liability Partnership (LLP) as their turnover approaches the VAT registration threshold. This way, they get multiple trading periods before registering for VAT, even though the same person is running the business. The key to this plan is that a new legal entity is used each time, regardless of who operates that entity.
Potential VAT Savings
By changing the legal entity before your business reaches the VAT annual registration threshold, you can avoid charging VAT on your sales. When the new legal entity takes over the business, the sales from the previous entity are ignored, regardless of who was running it, and a new VAT registration threshold is available. For example:
- First Period: Sole trader, £89,000 turnover.
- Second Period: Partnership, £89,000 turnover.
- Third Period: LLP, £89,000 turnover.
- Fourth Period: Ltd, £89,000 turnover.
Each period avoids £17,800 in VAT, potentially saving £71,200 over four periods.
Warning: Breaching the VAT Registration Threshold
If your sales exceed the VAT registration threshold by just £1, you must register your business for VAT within 30 days. This creates an obligation to register for VAT. As a result, the Transfer of Going Concern (TOGC) rule is triggered, which requires the new entity to be VAT-registered, even if the previous entity was not registered. This means the new entity must register for VAT from the day it takes over, eliminating the possibility of a VAT-free trading period.
To ensure that the registration threshold isn’t breached, a sales buffer of £80,000 is suggested to prevent registration from triggering.
Conclusion
Whilst there is no limit to the number of entities you could transfer to, incorporating is a logical commercial progression you would take anyway.
Perhaps you should not go backwards on yourself and repeat the four-entity cycle. This may provoke HMRC to think of ways to address it, possibly using abuse-type principles. Or they might try to make mischief if it wasn’t done correctly, e.g., if the income still went into an old partnership/sole trader bank account.
This leads to the question of whether the constant effort and cost associated with changing entities are worth it. This would mean insurance updates, bank account changes, supplier notifications, HMRC and Companies House registrations, etc. Even the most organised business owners might think it becomes too much hassle to change entities again rather than complete another VAT-free sales cycle.
The VAT savings likely justify the effort to change at least one entity for a small facial aesthetics business. However, successfully implementing four changes will need strong administration and financial skills.
