Over the years, I have encountered a number of ways business owners have sought to separate businesses into several smaller businesses as a means of avoiding the VAT registration limit. For retail businesses the advantages of this can be significant. There was, for example, a launderette chain where each laundrette was individually owned by a different family member each trading as a sole proprietor. I have seen a number of husband and wife businesses where the husband ran one part of the business, e.g. a pub, with the wife running another part, e.g. the pub catering or accommodation. These businesses appear to have avoided the VAT net with varying degrees of success, but what is apparent is that HMRC will almost certainly challenge such splitting where they believe that this is in fact artificial.
Where HMRC believe that the business has been artificially split they have the power to issue a direction that the “Disaggregated” businesses must all be treated as one for VAT purposes, with the VAT registration limit applying on this basis. HMRC will say that an artificially separated business will typically display links across three different areas:
Financial links – for example, using the same bank accounts or accounting records
Economic links – such as the same circle of customers, using the same advertising or phone numbers
Organisational links – such as common management, staff or equipment.
The problem here is that many businesses will structure themselves in a particular way for any number of reasons, which have little or nothing to do with VAT or tax. For example, property developers/investors may hold each property or class of property in a separate company to mitigate risk or to meet banking requirements. Family owned/managed businesses are also likely to have much closer links in the three areas above as replicating banking, assets and administrative arrangements is likely to be far more costly.
The moral of the story is that danger lurks for anyone trying to be overly inventive and needless to say, there are expensive sanctions for getting it wrong. Perhaps a quick chat with a VAT advisor at Wilkins Kennedy in the first instance could save significant pain later on? Contact us at our offices in Guildford and Egham for more information.
Guildford office 01483 306318
Egham office 01784 436561
