Splitting Businesses to Avoid VAT

Avoiding VAT

Because the standard rate of VAT is now 20%, businesses are tempted to think about splitting their company into different entities, so each part falls under the compulsory VAT registration threshold when split - according to Alliance Accounting.

This means they would not have to register with HMRC to have to charge VAT to those customers. HMRC are aware of this tax planning and if they believe the company has been artificially separated to avoid VAT, they will direct that the businesses should be re-aggregated.

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An example of business-splitting are VAT-registered farms, where a member of the family runs a bed & breakfast business which is not VAT registered, from the same location.

HMRC will argue that because some buildings have both a farm use and a B&B use, the two businesses are part of a whole and should come under one VAT registration.

HMRC is required to consider a whole range of factors to determine whether the businesses are actual separate entities.

The taxman must consider whether each factor points towards one business, two separate businesses, or is neutral. If the majority of the factors are either neutral or point towards separate businesses, HMRC should not direct that the businesses be combined for VAT purposes. You can always appeal to the Tax Tribunal.

Check List

If you operate two or more businesses within your family, the following questions can help you decide whether the Taxman will challenge your businesses as being artificially split:

1. Is the business designed to operate as an individual business, despite utilising central resources, for example a franchised business?
2. Is the business so intrinsically linked with other 'connected' businesses that it can only be considered to be one indivisible business, for example wet sales and catering in public houses and restaurants?
3. Is the business carried on in separate departments or divisions, but is in reality one legal entity, for example a quasi partnership? 
4. How much independence does the business have from any other 'connected' businesses by way of legal and technical resources? 
5. Does the business owner have autonomy in the way he/she operates the business, for example access to premises, opening times, recording sales, purchase of stock and materials, bank accounts and annual accounts? 
6. What would happen if the business owner was unable to operate their business personally?
7. Has the business owner registered the business with HMRC for corporation tax or income tax separately from those businesses that are 'connected'? 
8. Is the business owner working together with their partner/spouse in his/her business as a quasi co-owner or just assisting them as a family member in their business?

HMRC has the power to direct that two or more businesses should be treated as one business for VAT purposes, even where those businesses are contained within separate legal entities, such as limited companies.