Is it acceptable to have two businesses for VAT in this scenario

Is it acceptable to have two businesses for VAT...

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Hi,

I should be grateful for your comments on a scenario I have.

I currently have a client who has an online retail business as a sole trader, but has not yet hit the VAT threshold and so is not registered.

They are now thinking of setting up a separate branch/business selling the same items but by 'wholesale' to the trade. It is certain that this business will hit the VAT threshold and will need to be registered for VAT - in any event, selling to other businesses and not to individuals, charging VAT on the goods will not effectively increase the price (or reduce the profit - whichever way you see it).

My questions is, would it be acceptable for two different businesses to be set up – one for retail not being VAT registered, and another for wholesale being VAT registered and if so? I know you are not supposed to split similar trades for VAT etc – but would that be the case in this situation?

I look forward to your comments/ideas.

Thanks

Replies (7)

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By riksti
12th Apr 2012 09:29

here

http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm#7

Your client seems to be trying to do what HMRC states they should not do:

Situations that HMRC may consider a single taxable person for VAT purposes include:

Separate entities selling to registered and unregistered customers. The VAT-registered entity sells only to VAT-registered customers, and the entity not registered for VAT sells to customers who are not registered for VAT.

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By adam.arca
12th Apr 2012 14:00

It's the person who is registered....

....and not the business.

If the same person owns two separate businesses, they need to be considered together for VAT registration and accounting purposes.

If your client wants to run two businesses with different VAT status, then he needs to ensure the ownership details of the two businesses are different and that the disaggregation isn't artificial.

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By mrme89
12th Apr 2012 14:56

Agree with Adam Arca.

 

Although, can your client get round this by introducing a partner (spouse) to one of the businesses, therefore seperating the two?

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By TT123
12th Apr 2012 15:18

Thank you for your comments.

@mrme - would the two businesses be seperate if one was ran as a sole trader or partnership for the retail and the other a limited company for the wholesale for instance. These will then be seperate legal entities, but could HMRC argue they be classed as one?

@adam.arca So it is suggested that the ownership of each 'entity' should be different. Say wife is sole trader for retail, and the ltd company for wholsale can be owned 50/50 by husband and wife. this would then be ok? HMRC dont seem to mention ownership - just entities

HMRC.......

If HMRC decides that you have artificially separated one business into smaller parts to avoid registering for VAT, it can decide that the entire business is a single taxable person and therefore must be registered for VAT. See the description of 'taxable person' in the section in this guide on who can and can't register for VAT.

Situations that HMRC may consider a single taxable person for VAT purposes include: 

Separate entities selling to registered and unregistered customers. The VAT-registered entity sells only to VAT-registered customers, and the entity not registered for VAT sells to customers who are not registered for VAT

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By mrme89
12th Apr 2012 15:40

Hi TT123

 

I am not eniterly sure but I think a ltd co and a sole trader would be seperated but then he would have to consider the corporation tax, increased accountancy fees etc - would it then be worth just been VAT registered for both parts of the business?

 

 

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By riksti
12th Apr 2012 16:16

Have a look at an earlier question on the same subject: https://www.accountingweb.co.uk/anyanswers/forming-second-ltd-company-avoid-vat-turnover-threshold

Looks like a similar situation to me, whether your client is forming a ltd co for the second trade or starting a partnership with the wife.

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By mrme89
12th Apr 2012 16:37

Good link Riksti, some interesting comments.

 

 

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