Is Business Splitting a Viable Option?
The existence of a VAT registration limit – currently £85,000 in a 12 month period - creates a situation where a business trading just below the limit, may be more competitive than a person operating a similar business but trading just over the limit. This is especially true where the business has customers made up of private individuals who are unable to reclaim any VAT charged and where there is little deductible VAT for the business for example, where the principal cost to the business is wages.
One “solution” to this situation is to disaggregate the business into two or more separate entities so that one or both trades below the registration limit. The bad news is that HMRC takes the view that this creates unfair competition and is an artificial loss to the public purse and as such, they have powers to aggregate the turnover of artificially disaggregated businesses so that they become registered for VAT.
HMRC only issue a direction to treat two or more businesses as a single entity if they believe the businesses have been separated artificially to avoid VAT. In determining if the separation is artificial, HMRC looks to see if there are:
- financial links between the businesses;
- economic links between the businesses; and
- organisational links between the businesses.
Note – the keyword above is “and”. HMRC has to prove all three links before they can issue a direction to treat separate businesses as a single entity.
HMRC will typically look to see if:
- family members are involved in the separate businesses (for instance, the wife running one part of a business and the husband another part – this used to be fairly common in pubs where the licensee would operate the pub and the spouse would sell the food separately);
- there is a single bank account and financial records used for both businesses;
- separate phone numbers, websites, e-mail addresses are used for the businesses;
- separate floor space in any building is used for the different businesses;
- separate stock is maintained; and
- there are separate IT systems, plant, fixtures, etc.
Of course, the real world doesn’t always lend itself to the easy interpretation of what is artificial or otherwise – it’s ultimately a subjective call. A couple who run their own businesses might meet, get married and decide to help each other by sharing resources – does that mean they have artificially split their businesses? Of course, it doesn’t and HMRC can get this wrong.
HMRC’s powers target “artificial separation”. The intention is that a separation of an existing business for genuine commercial reasons should not be caught. Similarly, where two or more businesses that were established separately operate very closely, they should not be caught.
There is some good news - registration as a result of a direction issued by HMRC can only apply from the date of the direction or, where specified, a later date. It cannot be backdated and affect turnover from previous periods. There is an obvious follow-up question to this – why not just segregate your business even artificially until such time as HMRC come along and issue the direction? It’s a tempting thought of course but there is a big health warning.
Although HMRC cannot backdate a direction, they may register a person from an earlier date on the basis that there only ever existed a single person from that date and throughout that period. That is to say, there was only ever one business run as a partnership between the various parties concerned. Thus, an assessment for back tax and a penalty may also be issued.
Of course, whatever you do in this area, it is important to get advice and understand your situation better. If you would like to get in touch with me directly, you can send an email to firstname.lastname@example.org or click here to get in touch with the team today.