If you acquire or start a business which is not registered it might immediately come within the scope of VAT if you already own another business. When might this apply and what steps can you take to prevent it?

Registered persons

We’ve mentioned in other articles the common misconception that it’s businesses that register for VAT when actually it’s the “person”, e.g. an individual or company, which owns the business that the registration applies to. This isn’t just a pedantic observation, it’s a fundamental aspect of VAT registration.

Example. Omar, a sole trader, owns a restaurant and is registered for VAT. He acquires an office cleaning business previously owned by a person not registered because their total business turnover was below the registration limit (£85,000). The cleaning business is within the scope of Omar’s VAT registration from the day he acquires it. He must charge its customers VAT and include its transactions on the VAT return.

Avoidance with risk

A common and sometimes effective method of avoiding VAT registration is to use a different person to own a business. In our example, Omar could set up a company to acquire and operate the office cleaning business. Because the company is a separate “person” from himself its turnover would be considered separately from Omar’s restaurant. This won’t work in all circumstances.

Tip. If you want to avoid having to combine businesses within a single registration use different persons to own each, e.g. a sole trader and a company, a partnership (say, husband and wife) and a sole trader, a company and a partnership.

Trap. HMRC powers authorise it to combine multiple registrations into one if it believes businesses have been separated (HMRC refers to this as disaggregation or business splitting) resulting in VAT being avoided. However, it can only do this from the time it issues a notice directing the businesses to be covered by a single registration. It can’t apply it retrospectively.

Related business

In practice, HMRC is only likely to consider disaggregation if there are strong economic, financial and organisational links between the businesses. For example, a café owned by one person and an event catering business owned by their spouse operated from the same premises. Even then it’s possible to take steps to make it difficult or impossible for HMRC to succeed with its argument.

Tip. As far as possible each person should keep their business’s administration, e.g. bookkeeping records, and operations independent from the other. They should also ensure that any supplies between businesses should be done on wholly commercial terms that are consistent with those that would apply to third party transactions. They should:

  • maintain separate bank accounts and financial records
  • generally keep finances separate
  • not make joint advertising arrangements or have a joint website
  • not share staff but where they do, make sure there are separate contracts and a clear delineation of work.

Where two or more businesses are treated by their owners as separate HMRC can direct to treat them as one for VAT registration purposes where they are significantly linked. To avoid this the businesses should, as far as possible, maintain independent economic, financial and organisational links, or minimise them.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.