Approaching VAT Threshold

Approaching VAT Threshold

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Our business is a recording studio and music rehearsal rooms complex. We have been running the business for almost three years as a partnership. We are rapidly approaching the VAT threshold and have sought advice from our accountant.

Our accountant has suggested separating the business into two parts. One part would be the recording studio and the other part would be the rehearsal rooms which are quite different services. He has suggested forming a Limited company for the rehearsal rooms and a partnership for the recording studio.

From the reading I have done I am concerned that this would be classed as artificial separation. The two businesses would be run from the same premises, have the same owners, share some of the same customers etc.

I basically want to get some alternative opinons as to whether or not it would be legitimate to separate the business in this way.

Many thanks

Sam

Replies (8)

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By spidersong
31st Oct 2011 08:31

What do they get with the rehersal rooms?

If you don't provide more than the room, then this is an exempt supply of land and wouldn't count towards the threshold anyway so splitting it off wouldn't do anything.

Since you're not registered then I'm assuming you haven't opted to make the room income taxable. So the only way it would be taxable would be if you provided equipment or other services with the rooms. The mere fact that the rooms are soundproofed wouldn't be enough to make their hire a taxable supply.

In regards to the disaggregation query, then I'd be very surprised if HMRC didn't attack it as artificial separation, as you say same premises, same owners, same customers, same area of activity, tends to smack of same business. This is especially with the fact that the only reason you seem to be considering it is because it's been suggested as a way of avoiding VAT.

If you had a reason beyond the VAT to do it this way then you'd be on a better footing, but HMRC tends to get suspicious when a reorganisation of one business into two happens as the one business hits £65-£70k turnover.

I'd say your best bet is to make sure that the supply of the rehersal rooms is exempt, and that anything beyond that is a sepaprate supply if possible.

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By samh
31st Oct 2011 09:44

Thanks for your response and clarifying the situation. We also hire out equipment with the 3 rehearsal rooms so I guess they are not exempt.

 

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By thisistibi
31st Oct 2011 10:15

Incorporate

It doesn't really answer your question, but bear in mind that if you incorporate the partnership, as I understand it, your VAT registration threshold will be reset - you can then accrue another £73k of revenues before having to register.  That might not be a long term solution, but it's worth bearing in mind.

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By blok
31st Oct 2011 12:46

.

Are you sure? is this not an automatic TOGC?

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By thisistibi
31st Oct 2011 13:16

@Blok

Is your question aimed at me?  As I undestand it, It's not an "automatic TOGC" unless you are already VAT registered before the transfer of trade.

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By Monsoon
31st Oct 2011 14:00

VAT counter reset
I agree with Tibi, the VAT counter gets reset if the self employment is not registered for VAT.

To the OP - even though the two activities are different, I think you're right to be concerned about artificial separation under the "common ownership, economic links, etc" test for artificial separation. If you look through the criteria and think you can pass quite a bit of them and are happy to argue it to HMRC if they ask, on the understanding that they might disagree and demand registration, then you could go for separation - depending on your attitude to risk. Remember two trading vehicles = two sets of accounting records and two accountancy fees!

I believe if HMRC direct that two businesses are artificially separated, then VAT registration is applied from the date of the decision, and not back- dated to when the separated businesses jointly went over the VAT threshold, but I could have misremembered this, so it's worth checking before adding this factor into your "attitude to risk" assessment.

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By blok
31st Oct 2011 14:13

.

hi tibi, yes it was aimed at you, but I take your point.  It seems to provide a very definite advantage, although granted it is not something that can be repeated.

regards

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By spidersong
31st Oct 2011 14:23

Backdating registration

In response to Monsoons comment on backdating:

Whilst it's correct that a direction to aggregate two separate companies into one registration can only be prospective not retrospective, the normal route taken by HMRC is to argue that the separation was never actually succesful. That is they say that though you've got two companies the links are so tight that in reality only one company has ever carried on the business no matter what the accounts say and so you need to be registered from the date this single entity went over the threshold.

So you'll only normally avoid backdating if you can demonstrate that the split was done perfectly, if you've left an in by not novating contracts, not setting up PAYE properly, not having separate procurements routes or any of dozens of other errors that occur then you may still be looking at a backdated registration.

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