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No business wants to pay more money if it can avoid it, which is why the thought of running two separate businesses to remain under the VAT threshold is appealing. However, before you split businesses, consider the implications of lowering a VAT bill like this.
At Auditox Accountancy, we know HMRC rules and offer straightforward support for businesses.
Whether you are a sole trader, a limited company, or just interested in being as financially viable as possible, we ensure you know all the VAT regulations, to ensure you avoid falling foul of Value Added Tax concerns.
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There are specific rules for businesses to register for VAT, and you can't avoid registering for VAT because you don't like HMRC rules.
Many business owners establish multiple enterprises with the hope of distributing their income, aiming not to surpass the VAT registration threshold, which stands at £85,000 for the 2023/24 fiscal year (a figure unchanged since 2018). Remaining below this threshold means avoiding VAT registration, potentially offering a competitive edge.
However, HMRC believes such steps are potential tax evasion. To counteract this, HMRC has laid out specific guidelines ensuring that any business division is authentic. It's essential to demonstrate that there isn't a 'financial, economic, or organisational' connection.
HMRC typically searches for connections like:
Financial Support and Links:
Economic Links:
Organisational Links:
However, there are valid reasons to create a separate business. Clear indicators that could favourably assure HMRC when splitting your business include:
Dig deeper: How To Avoid Paying VAT As A Business
Simply put, if your intent behind a particular business split is primarily to avoid VAT, then it's likely not okay. It's essential to have genuine, legitimate reasons for business separation that aren't centred on VAT avoidance.
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Genuine business splits are entirely acceptable. However, the onus is on the business owner to prove the legitimacy of the split if challenged by HMRC. Keeping clear and distinct records, maintaining separate bank accounts, and ensuring each entity has its unique business purposes can help validate the split.
If you're considering splitting a VAT-registered business, please consider the following factors which might lead to HMRC deducing you have an artificial separation.
Uncover more: How Far Back Can HMRC Go
The existence of two genuinely different businesses prior to any splitting considerations can be a strong indicator of legitimacy.
If the businesses share a financial interest, such as the same bank account or common business profit, it can indicate a lack of genuine separation.
Shared clientele, shared advertising campaigns, or mutual reliance can show businesses closely bound economically.
Do the firms share management, employees, or organisational links and strategies? Genuine separation means distinct structures.
Structural separation is a concept often discussed in the realm of business and taxation, particularly in situations where there's a potential for crossing paths with VAT liabilities.
At its core, structural separation entails creating a clear, genuine, and effective division of one business into two or more businesses. Businesses aren't separately registered on paper; it extends to every facet of the business operations:
Objectives: Each separated entity should have its unique goals and mission, be it targeting a different market segment, introducing a novel product or service line, or any other distinctive aim.
Operations: From procurement to delivery, the day-to-day operations of each entity should function independently, such as separate advertising.
Financial Management: Each entity must have a distinct financial ledger, bank accounts, and financial reporting. When separated properly, there is a clear demarcation in revenue sources, expenditures, assets, and liabilities.
Splitting a business isn't a decision to be taken lightly. There must be compelling, genuine reasons for such a move:
Diversification Of Product/Service Lines: If a company wants to introduce an entirely new product or service that caters to a different demographic or requires a different operational strategy, then separation can be logical.
Operational Efficiency: Sometimes, managing diverse operations under one umbrella can become unwieldy. Splitting can lead to better management, clear focus, and improved operational efficiency.
Targeting Distinct Markets: If there's a move to target vastly different markets, it might make sense to separate the entities, especially if the branding, marketing strategy, and sales channels differ significantly.
Tempting as it might be to split a business on a whim, especially when considering potential VAT advantages, such a move without genuine reasoning can have severe consequences:
Yes, if each business operates independently, they need to be registered separately.
Take a look: Closing Down A Business Sole Trader
For VAT purposes, HMRC considers:
Diversity Of Customer Base: Does each entity cater to both VAT-registered and non-registered customers? A blend of both might raise eyebrows if it appears strategic.
Shared Resources: If the businesses share equipment, it will cause concerns with HMRC. Genuine separation often entails distinct operational resources for each entity.
Dissection Of Standard Services: If a hotel, which usually provides bed and breakfast as a single package, separates these services into two distinct entities, it may come under scrutiny.
Unified Business Appearance: If two ostensibly separate organisations still seem, to the public eye, like a single entity, it can draw attention. If two smaller businesses have the same offices, share branding, marketing campaigns, and more for mutual benefit, it could prompt concerns.
Common Management: Separate companies typically have independent management teams. If both entities are overseen by the same management, reasonable judgement means HMRC might view this as a sign of artificial separation.
Delve into: How Likely Are You To Be Investigated By HMRC
Having a separate bank account doesn't diverge financial interest enough to indicate a split business. This step alone will not help you avoid the VAT threshold.
Beyond the aforementioned indicators, the HMRC tribunal will often focus on a key question:
"Are the separated businesses operating as genuinely distinct entities, or is the separation merely a façade to gain VAT advantages?"
The answer to this question is pivotal. It’s not about the mere act of having two businesses; it's about the genuine intent and operational distinction between them. The tribunal will evaluate all evidence, from financial transactions to customer interactions, to ascertain the answer.
At Auditox Accountancy, we are specialists in many matters, helping businesses with VAT purposes, avoiding tax avoidance issues, and understanding artificial separation issues. Contact us to do your own tax returns and more.