I've seen a few comments lately on how to stay under vat, and splitting your business concerns is a dodgy area.
Some necessary lecturing first: Under VAT rules, the obligation to register is with the person and not with the business. That means in practice that where a person operates more than one business, they all fall within the same VAT registration, regardless of how minor or distinct those businesses may be.
The following is useful guidance when a single business is split into more than one businesses - each one owned by different persons (e.g. each business is run by a different spouse). Usually people do that to avoid having to register for VAT (e.g. because turnover from each separate business activity is below the VAT registration threshold). Or, for purely commercial reasons, e.g. when the business sells to unregistered customers who cannot reclaim VAT.
As you may have guessed, the VAT-man doesn’t like that and they have given themselves the powers to stop it. The VAT-man is more likely to succeed if the persons carrying out those business activities, in the words of the vatman have “close financial, economic and organizational links”. Read my lips: To avoid being caught, the business owners need to prove that the reason for the disaggregation is commercial considerations and not vat avoidance.
Here are some examples, resulting from court cases down the years, where a number of persons carrying out separate business activities have been treated as one person for VAT purposes and required to register for VAT as a single person:
One person is the “controlling mind” of all business activities.
No involvement in each other’s business.
No financial inter-dependence of any sort between the two businesses.
Any finance to buy a business comes from the owner and not from the owner of the other business.
Each party must have their own business insurance.
Each party must have their own, independently charged, overheads (rent, rates, utility bills).
The public’s perception of the business must be of two different businesses.
The different entities do not use the same equipment.
The existence of separate bank accounts and accounting records.
The reason for keeping the businesses separate is a commercial one and not because of tax avoidance.
Pretty inconsistent and conflicting the court decisions have been though, so one cannot be always sure that any steps are tax-proof. Where the VAT-man directs that the all persons be treated as carrying on a single business, such direction cannot be retrospective (this could be useful to avoid VAT registration for a while until HMTC spots the arrangement). Having said that, please bear in mind that they also have powers to order registration for day one if they can show (!) that the businesses were in fact never separate!
Graham
