If your sales are approaching £85,000 in the last 12 months, then you are also approaching the threshold where you must register for VAT.
You might have decided you do not want to register, as you are worried about how adding VAT would affect your pricing. What’s more, you’ve heard on the grapevine that you can just split your business up to avoid VAT registration.
So can you?
Yes and No.
HMRC and ‘Artificial Separation’
HM Revenue & Customs for obvious reasons are dubious about businesses being split for VAT, where they appear to be one business only.
There have been many cases in the tax courts over the years on this point. HMRC will seek to deal with what it calls ‘disaggregation’, i.e. owners splitting their business up for VAT reasons.
If the HMRC think you have simply split your business down into two legal businesses but they effectively operate like one, they can argue that it is one business for VAT purposes. This applies whether you have intentionally split your business, or it just looks like you have to HMRC.
If they succeed in their argument / can prove this in court, HMRC will have the power to force this to be the case moving forward. They can then issue a ‘back VAT’ bill for the previous period.
One company or two?
In seeking to establish a case of disaggregation , HMRC and the courts will consider things like:
- Are the businesses reliant on each other? (Such as sharing staff or finances)
- Do they have the same equipment or facilities?
- Do they operate out of the same premises?
- Do they have separate tills?
- Do they keep separate records?
- Do they have different business rate bills?
- Do they have individual licences (such as music licences)?
- Do they have separate websites?
There is no one single factor that decides whether your particular business split is acceptable, it’s a balance of the facts.
This doesn’t mean to say it isn’t possible to win your case. HMRC have been defeated on these points in several cases where the judges felt there was sufficient evidence they were in fact separate.
When is a pub not a pub?
There have been many court cases over split businesses and VAT. Here are a couple of examples of where it has worked and where it hasn’t, for very similar businesses.
Case 1: Pub and B&B
In a case from 1999, a pub was run by a husband and wife team. The wife ran a Bed & Breakfast and food business, alongside the pub partnership. Effectively the pub supplied the drink, the B&B and food were supplied by the wife’s business. They split the two businesses for VAT.
The business shared most resources and obviously the premises, and the B&B paid no rent to pub. This is something you would expect to see in a normal business situation. However, the couple lost their case, and HMRC were able to treat them as a single business and issue a VAT bill.
Case 2: Pub and B&B
In a case from 2001, there was almost the exact same situation for another Pub / B&B business. However, in this case, ‘rent’ was paid by the B&B to the pub. There were also different staff and a separate entrance. They had separate accounting records as well as a few other factors. In this case, the HMRC lost, and the VAT split upheld.
As you can see, it comes down to the facts and evidence – and the decision of the court.
If I am genuinely splitting my business, can I stop a challenge?
Ensuring you have as much separation of resources and clearly defined ‘lines’ between the two businesses is key.
Another way is that you could run the businesses as different ‘entities’. For example, one business as a Limited Company, the other one as a Sole Trader.
Ultimately though, if you can’t legitimately do this, and/or it makes commercial sense to continue running as one business, you need to VAT register.
Don’t be afraid of VAT
VAT is just another stage of your business journey to deal with. After all, it means your turnover is larger than before – VAT tax is a ‘success fee’! With good planning, it shouldn’t be seen as something to avoid.
Note: This is a detailed issue, so we would recommend getting professional advice on your situation as we’ve barely touched the surface in this blog.
Can my accountant advise me on this issue?
Yes, they can – and so can we. If you find the prospect of registering for VAT confusing and maybe a little scary, do take professional advice. As an established independent firm of accountants, we can help you look at your business, discuss your options and explain the benefits of VAT registration (yes, there are some!).