I have a cunning plan to avoid registering for VAT…….
….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!
I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?
You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.
What HMRC will consider to be artificial separation:
HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:
Separate entities supply registered and unregistered customers
In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.
Same equipment/premises used by different entities on a regular basis
In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.
Splitting up of what is usually a single supply
This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.
Artificially separated businesses which maintain the appearance of a single business
A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.
The meaning of financial, economic and organisational links
Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
- financial support given by one part to another part
- one part would not be financially viable without support from another part
- common financial interest in the proceeds of the business
- seeking to realise the same economic objective
- the activities of one part benefit the other part
- supplying the same circle of customers
- common management
- common employees
- common premises
- common equipment
HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.
As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.