Artificial Separation to Avoid VAT

29 October 2012

If you run more than one business, there is a chance that HMRC will review each business activity to decide whether the businesses should be viewed as one business for VAT purposes.

If either or both “businesses” are not currently VAT registered and the combined turnover from the businesses exceeds the VAT registration threshold (currently £77,000) then HMRC may require the businesses to be VAT registered retrospectively from the time the threshold was breached.

Businesses dealing with non-business customers will find it extremely difficult to retrospectively charge VAT to customers and could be left with the output VAT due on these sales as an additional cost to their business.

When considering whether artificial separation of a business has taken place, HMRC look at a number of factors:

  • Do the businesses have separate accounting records and financial statements?
  • Is there any commercial relationship between the businesses, if so, is this at arms length?
  • How are overheads, rent, insurance, rates etc dealt with? Are they invoiced to each business or is there a method of apportionment?
  • When advertising, are separate adverts placed by each business?
  • Could one business exist without the other?
  • Do the businesses share equipment or is separate equipment used by each business?

If it is evident that there are financial, economic and organisational links between the two businesses it is likely that you could be open to challenge from HMRC. You should look critically at your businesses to understand whether any changes need to be made to their operation/administration to strengthen your situation from challenge.

If you run separate businesses and either or both businesses are not VAT registered, and the combined turnover of your business is greater than or approaching the VAT registration threshold of £77,000, then we suggest you contact us for further advice and a review of your situation.

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