Should you split your business to avoid VAT
Should you split your business to avoid VAT?
Q: My business is growing but I want to avoid registering it for VAT because I'm scared I'll lose customers if I pass on the 20% charge. I've heard you can split businesses into two or more units so that the annual turnover of each remains below the VAT registration threshold - can you explain my options?
A: This type of VAT avoidance is common in the pub trade where two businesses share the same premises with one partner running the food service as an unregistered business and the other the drinks service as a registered entity.
Whilst it is possible to do this legitimately, it must be approached with extreme caution. HMRC is wary of any business that seems to have artificially separated in order to avoid VAT. If you are found to be doing so, then you can face back-dated registration along with any charges and interest accrued over that time plus penalty fees.
If you do decide to split your business then you must do so in practice and not just on paper - for example setting up separate bank accounts, separate records and legal entities (perhaps running one as a limited company and one as a sole trader) or charging rent to one arm of the business.
In particular HMRC will assess the following:
Financial links:
• financial support between the businesses
• if one business would not be financially viable without support from another
• common financial interest in the proceeds of the business.
Economic links:
• the businesses have the same economic objective
• the activities of one business benefit the other
• supplying the same customerbase.
Organisational links:
• common management
• common employees
• common premises
• common equipment.
If you own connected businesses then you will need to take care registering their VAT status under any circumstance. Please contact us for further guidance.