We are often asked how to “avoid” paying VAT or how business owners can somehow ensure their business falls under the compulsory VAT threshold.

Business owners are often tempted to split their business into different entities, so the different parts fall under the compulsory VAT registration threshold when split. The belief is that you can then avoid registering for VAT, or can deregister, and therefore you won’t have to charge VAT to your customers.

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HMRC is aware of this “tax planning” strategy! If they believe you have split your business to avoid VAT they have the power to treat separated businesses as one legal entity!

Test Case

1. Mr Vaughan is a self employed plasterer who diversified into floor screeding.
2. On the advice of his accountant, the plastering and floor screeding activities were separated with the latter being run by a partnership with his wife.
3. The partnership registered for VAT as its customers were mainly housebuilders to whom zero rated supplies were made and the sole trade was not registered for VAT.
4. The plastering was mainly undertaken for non-VAT registered customers so there was a competitive advantage to having this activity run through a non-VAT registered entity.
5. HMRC assessed Mr Vaughan for VAT on the basis that the business had not been separated into two.
6. The First Tier Tribunal (FTT) examined the separation of the business and concluded that, although the separation was not complete – for example some suppliers addressed their invoices to the wrong entity – Mr Vaughan had done enough that from 1 December 2013 there were two businesses.
7. However, prior to this date there was only one business and HMRC could issue VAT assessments in respect of this period.
8. NOTE. HMRC only have power to serve directions prospectively and as HMRC had not served such a direction, the two businesses should be considered separately from 1 December 2013 to date.
9. The FTT left it open to HMRC to serve a direction for the future!

HMRC has the power to direct that two or more businesses should be treated as one business for VAT purposes, even where those businesses are contained within separate legal entities, such as limited companies.

It is therefore always essential you discuss your business structure with a qualified accountant to avoid any challenges