Many businesses would like to avoid being VAT registered. Especially as the VAT registration threshold has been frozen for at least two years. This article discusses the circumstances where HMRC might consider business splitting and VAT avoidance has taken place.
When considering business splitting and VAT avoidance it’s important to determine what is taxable turnover for VAT. For example, some sales might be considered outside the scope of VAT.
WHAT IS BUSINESS SPLITTING?
When 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.
For example, you might decide to form a partnership with your spouse selling computer components online and carry out your digital marketing consultancy as a sole trader.
Neither one of these businesses might exceed the VAT registration threshold in isolation. However could HMRC argue that business splitting and VAT avoidance has taken place and force registration?
Typically the answer to whether or not business splitting and VAT avoidance has taken place is not straight-forward.
BUSINESS SPLITTING AND VAT AVOIDANCE – HMRC’S VIEW
The VAT man has detailed the circumstances where they consider business splitting and VAT avoidance have taken place. For example, the splitting of what is usually considered a single VATable supply. 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.
However HMRC must show that all three links apply to successfully argue that business splitting and VAT avoidance have taken place. They must also prove that VAT avoidance was the motive behind the split, rather than a commercial decision by the business owners.
If HMRC can prove VAT avoidance has taken place then they have 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 AND VAT AVOIDANCE – PRACTICAL POINTS
Most independent businesses trading from the same premises where no friends or relatives are involved usually have the following arrangements in place:
HMRC are far more likely to challenge business arrangements involving family members. A common example is where a husband (or wife) runs a pub as a sole trader and a husband (or wife) owns the catering activities separately. The latter activity happens to trade just below the VAT registration threshold.
BUSINESS SPLITTING AND VAT AVOIDANCE – A TAX CASE
Probably the most well-known case of business splitting is G & C Belcher v HMRC. This resulted in an unlikely victory for the taxpayer. This involved a husband and wife who were hairdressers operating as sole traders. However, HMRC considered they had always operated as a partnership. They were pursuing a six figure sum of VAT plus penalties.
The Belchers cause was not helped by a number of inconsistencies. For example their accountant produced one set of accounts and completed a partnership tax return(!). Additionally they only had one business bank account and a joint insurance policy.
However, despite all of this the tax tribunal was persuaded by the following facts and allowed their appeal:
BUSINESS SPLITTING AND VAT AVOIDANCE – PLANNING
A number of family businesses trade independently for commercial reasons without being caught by these provisions. However if there is any interaction between your businesses make sure those terms are at arm’s length. For example any loans to family members are drawn up on normal commercial terms.