Splitting Business to avoid paying VAT

The UK Government has fixed the registration for VAT threshold at £85,000, which will likely to be in place until 2020. Not perfect if you’re focusing to stay below the VAT limit.

With 20% VAT rate many owners are focusing to split their businesses into distinct entities, with every business operating below the VAT threshold. Thus, allowing them to raise their price margins without breaking the £85,000 barrier.

But is that a perfect idea? Let’s discover.

What are HMRC’s conditions?

Wondering, what will happen post-Brexit? As of now HMRC is informed of tax planning which they think has been put in place to unrealistically separate two entities.

However, HMRC has to provide evidence that the two businesses have “organizational, economic and financial links” before they can continue with a direction notice. Here what each one involves:

Organizational links: The business supplies the same customers, activities of one business part automatically give advantage to the other and there are same economic objectives from both entities.

Economic links: It includes common employees, management, premises and equipment.

Financial Links:  One element of the business would not be financially profitable without fiscal assistance from the other. The common financial interest would be the business profits.

If they determine that there were never two distinct businesses, the matter becomes one of the late registration which HMRC can recover for up to 20 years.

Examples of Businesses regularly targeted by HMRC

An often target of HMRC on business breaking grounds are VAT registered farms, where one of a family member runs the business which is not VAT registered, from the similar location.

It will proclaim that because some buildings have both a B&B function and a farm use. The two businesses are part of a whole and should fall under one registration for VAT.

Although the same building usage can be a component that specify two businesses are connected, HMRC is required to prefer a range of factors to ascertain whether the businesses are real separate entities.

The tax authorities must inspect whether every factor points towards one business, two distinct businesses or is indifferent. If most of the factors are either indifferent or point towards distinct businesses, HMRC should not administer that the businesses be combined for VAT objectives.

If you’re dissatisfied with HMRC’s decision you can appeal to the Tax Tribunal.

How to determine whether HMRC will challenge your business split?

Whether you run two or more businesses within your family, below mentioned questions can assist you in determining whether HMRC will challenge your businesses as being unrealistically split:

  • Is the business meant to run as an individual business, although using central resources such as a franchised business?
  • Is the business so fundamentally associated with other ‘connected’ businesses that it can only be treated to be one inseparable business? For example, catering and wet sales in restaurants and public houses.
  • Is the business conducted on in individual divisions or departments, but is in actual one legal entity? For example: a quasi-partnership.
  • How much freedom does the business have from any other ‘connected’ businesses through the means of technical and legal resources?
  • Does the business owner have freedom in the way he/she runs the business? For example, access to premises, opening times, purchase of stock and materials, recording sales, annual accounts and bank accounts.
  • What would happen if the business was unable to operate by business owners personally?
  • Has the registration been done with HMRC by the business owner for income tax or corporation tax individually from those businesses that are ‘connected’?
  • Is the business owner running their business jointly with their spouse/partner in his/her business as a quasi-co-owner or simply helping out them as a family member in their business?

HMRC has the capacity to direct that two or more businesses should be considered as one business for VAT objectives, even where those businesses are consisted with individual legal entities, such as limited companies.

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