09 May Can I separate my businesses to avoid registering for VAT?
The short answer is possibly, but we don’t recommend that you risk it unless there are valid commercial reasons.
When a business reaches a turnover level of £85,000 or more, in any 12 month period, it needs to register for VAT.
Some business owners when operating two trades, believe that they can run two or more businesses separately from each other to avoid reaching the VAT registration threshold which is £85,000. This approach is often considered as a way of avoiding charging 20% VAT to their customers who aren’t VAT registered, typically the general public. An example of this would be a hairdressing business who has not VAT registered individuals as customers.
Don’t Think Like Bob
Bob’s Builders & Carpentry has a total taxable annual turnover of £130,000 and is a VAT registered business, supplying a range of building services to domestic customers.
However, Bob believes that if he separates his business and splits them into two entities, he will no longer need to be VAT registered.
Bob feels that he offers two very different services and that they should be separated for VAT purposes.
Bob’s Builders expected annual turnover is £80,000 and Bob’s Carpentry is £50,000 – individually, both levels of turnover fall under the VAT registration but total £130,000.
Bob’s plan is to run Bob’s Buiders as a sole trader business and form a partnership business with his wife to run Bob’s Carpentry.
HMRC’S View
Although neither of Bob’s businesses exceed the VAT registration threshold individually,
HMRC consider the above approach as ‘artificial separation’ because when combined, the total turnover from both trades exceeds the VAT threshold. In this situation, HMRC would force VAT registration to take place.
What are the rules?
As always with most tax matters, deciding if business splitting and VAT avoidance has taken place is not always straight forward.
HMRC has detailed guidance surrounding on this subject here.
HMRC will look to see if:
- The separate entities supply both VAT registered and unregistered customers
- Both entities use the same equipment and premises
- Splitting up what is usually a single supply (i.e. a hotel separating bed and breakfast)
- Separating two businesses which maintain the appearance of a single business (see Bob above!)
- Both entities being control by the same management
A key question that a HMRC tribunal will ask to establish if the businesses are artificially separated is:
“Are the businesses closely bound by financial, economic and organisational links?”
Financial links
- Is financial support given by one business to another?
- Would one part not be financially viable without support from another part?
- Is there a common financial interest in the proceeds of the business?
Economic links
- Are both entities seeking to realise the same economic objective?
- Is there a mutual benefit to each business from the activities of the other?
- Do the activities of one entity benefit the other?
- Are both entities supplying the same customers?
Organisational links
- Are both entities ran by the same management?
- Do both entities employee the same staff?
- Do they use the same premises?
- Do they share equipment and resources?
HMRC will also consider structural separation of the businesses:
Structural Separation
HMRC will also consider how the businesses are structured:
- Do both entities have separate bank accounts?
- Is there separate advertising and marketing activities?
- Is there separate bookkeeping and accounting?
- Does each entity have it’s own branding, logo and website?
- Are there separate insurance policies?
But can it be done?
There can be valid commercial reasons for having two or more businesses when they are genuinely different businesses. However, before considering splitting any business, you need to consider if separately, they have any financial, economic and organisational links.
If separated properly, there can be useful savings whilst VAT registration is postponed but both businesses must be operating completely separately and independently from each other.
Business owners must use common sense and reasonable judgement, but every case is unique and so consulting with a specialist tax adviser is always advised. HMRC rules are applied on a case by case basis and you must carefully plan to avoid falling foul of these regulations. There is no one single factor that decides whether your particular business split is acceptable.