03 Feb VAT Avoidance & Business Splitting
It is common for many businesses to wish to avoid the requirement to be VAT registered. As the law currently stands a business making taxable supplies must register for VAT if sales exceed £85,000 over a 12 month period.
This would mean a potential increase in price of sales by 20%, which in some cases may make their product/service less attractive due to a loss of competitive advantage in selling price. If the customers are members of the public then the additional 20% VAT is a cost which is borne directly by them and cannot be recovered.
It is from this backdrop that many consider business splitting – two businesses trade independently of each other under different legal entities this is regarded as a business splitting arrangement. For VAT purposes, a legal entity is either a sole trader, partnership, LLP, limited company, club or association.
The two businesses independently may not be required to register for VAT as they do not meet the threshold (£85,000 sales) but if HMRC were to argue they are effective one business they may force VAT registration.
Avoidance of VAT
Whether or not business splitting has resulted in VAT avoidance is not straight-forward and depends on the facts of each case.
HMRC have detailed the circumstances where they consider business splitting and VAT avoidance have taken place and details can be found here.
A common example of business splitting is of a bed and breakfast business with one legal entity supplying the bed and another supplying the breakfast. This split can be disregarded by HMRC, if they can prove the two businesses have ‘separate financial, organisational and economic links’.
The key word here is ‘and’. HMRC must be able to show that all three links apply, not one or two, to successfully argue that business splitting has resulted in VAT avoidance having taken place. It is also upon HMRC to prove that VAT avoidance was the motive of the split, rather than a commercial decision by the business owners.
Where HMRC are successful in proving VAT avoidance then the law gives them the powers to treat the two separate businesses as one and register it for VAT. However, VAT registration can only be applied with a current or future date not retrospectively.
Business Splitting – Tips
Firstly there must be genuine commercial reasons behind any business split, avoidance of VAT cannot be a reason. Some basic indicators of a compliant business split may include the following;
· Separate bank accounts
· Registered for taxes separately with different trading names
· Independent record keeping and invoicing
Business splitting involving members of the same family are more likely to be scrutinised by HMRC so independence of the parties would be key factor and all dealings between such businesses must be done on a commercial basis at arm’s length.