Editorial team
AccountingWEB.co.uk
Share this content
0
12
20729

Two businesses and VAT - again

I recently saw a potential new client, husband and wife - operating as a driving school business.

Essentially the husband is the qualified instructor and the wife plays no part in the running of the business - other than "administratively". The business is divided in two and run by two limited companies, the shareholder and director of each being individually the husband and wife. Both companies thus come within the VAT registration threshold and consequently are not VAT registered.

I advised the husband and wife that, in my view, the two companies in fact operated as one business (in fact their website bears no mention of the two separate companies) and that both should be VAT registered. They were extremely concerned at this and stated that they had only ever formed the companies on advice given by their current (chartered) accountant as the business grew - essentially to legitimately avoid VAT registartion. I advised that they should obtain written clarification of the position from the current accountant as, I felt, it seemed an obvious instance of VAT evasion.

Subsequently I have been forwarded by the husband a letter he has received from the current accountant. In that he confirms his advice as correct in that as there are two companies involved, each with separate director, shareholders, bank accounts etc, HM Revenue & Customs would definitely not regard them as one business - and therefore not registrable.

As a consequence of the "definitive" advice now received from the (chartered) accountant the husband and wife have decided to stay with him rather than move to us - on the basis that he cannot be wrong........

My query I suppose is really to ascertain if I am correct in advising as I did (and as a consequence lost a client to a potentially negligent competitor) and, if I am, do I have any reporting obligations under the money laundering regulations?
John

Replies

Please login or register to join the discussion.

avatar
26th Jan 2007 12:40

I'm not so sure....
...of Paul's confirmation that the current accountant's advice is "...technically, not wrong..". If a limited company client, say a builder, presents himself to you as approaching the turnover threshold for VAT do you advise that he should be registering for VAT forthwith or that to avoid doing so (and thus remain competitive as far as his non-vat registered customers are concerned) he should immediately form a second limited company, with his wife as director and shareholder and channel new work through that? Isn't that all just conspiracy to defraud H M Revenue & Customs?

If, however, Paul feels that is legitimate tax planning then I will be happy to rest on his advice and advise all my clients accordingly.

Thanks (0)
avatar
25th Jan 2007 16:48

Not wrong, but dubious
Whilst the current accountant's advice is, technically, not wrong, the implementation of it may be suspect. If there advertising and other materials make no mention of the fact that there are 2 separate companies then HMRC may argue that customers believe they are contracting with just one or other of them.

HMRC will look beyond the standard checks on books & records and bank statement to decide if there are 2 separate legal entities and marketing material & stationary are one are that they will check. Shared materials could be used by HMRC as an indicator that there is, in reality, just one entity trading.

All that aside, if the school is using self-employed instructors, perhaps the better advice to be given might have been for the clients to set up an agency arrangement with the instructors so that only the commission they make is their turnover.

Regards

Paul Taylor
Senior VAT Consultant
Dains

Thanks (0)
avatar
By Anonymous
25th Jan 2007 11:19

I share your cynicism John.
I'm a VAT consultant, not an accountant and so VAT avoision is part of my trade I guess!. For example....Many small building firms tend to work upto the £61k threshold then simply stop working for their own business to avoid registration. They then spend the remaining months in the tax year working for another building firm and simply receive a weekly wage, which whilst taxable, is not considered turnover for their business.

Other firms that just go over the £61k limit can ask HMRC for exception to registration by claiming they only exceeded the limit this year due to an exceptional job/item but thereafter will be below again and so can avoid not registering for maybe a couple of years using this method. There are many ways to avoid VAT and all are legitimate but with caveats attached and yes, are basically successful based on the resources of HMRC finding out(!) or a legislative technicality.

Most of my clients are actually accountants (rather than individual businesses) who are being asked more and more complex tax and VAT issues by their clients, which goes beyond their traditional accounting role and in some cases their comfort zone .

Thanks (0)
avatar
25th Jan 2007 10:16

Thank you...
...for all the considered responses. I have been advising in these matters for almost 30 years but it's still good to get second opinions! I'm quite clear in my mind that the advice given by the incumbent chartered accountant is wrong (i'm sure many of our clients would welcome escaping VAT simply by setting up a new company each time their turnover approached the VAT registration threshold!) but being "caught out" relies on the resources of HMRC.

Maybe it also comes down, dare I say it, to some "qualified" accountants simply not having the experience or expertise to advise in these matters and, when challenged, having difficulty admitting the wrong advice to their clients? Another discussion for another day I suspect......

Thanks (0)
avatar
24th Jan 2007 17:35

is it ok to assume this is not evasion?
Both companies effectively run as one as far as the public are concerned - there is no distinction between the two, although there are separate bank accounts. Self-employed drivers are used which is the reason why turnover on a grouped basis is in excess of the vat registration limit.

I quite understand that vat registration in such instances will normally only apply from a future date, not retrospectively as used to be the case - but surely if a "business splitting" exercise like this has been carried out with the sole, not incidental, intention of not registering for VAT is that not more than just avoidance?

Thanks (0)
avatar
24th Jan 2007 21:19

well.......
.....the accountants advice is not correct - HMRC VAT section would regard the two entities as one for VAT purposes on the facts you give.

But .....
the husband and wife team are demonstrably not guilty of anything - they have in fact been very honest. They were concerned, took your advice, and obtained a written opinion !! So they are absolved from any money laundering allegations (in my view - goodness knows what the thought police would say).

So only question is can you (or should you) take action re the accountant?
Well, I suspect not really. What are you going to do? Report him to ML authorities? No doubt David Winch can tell us if there are grounds for that, but it is easy to think of why there are no grounds to do so.
I had a worse case recently where the incumbent gave disastrously negligent and incorrect advice to a potential client re VAT registration issues. I was able to advise the client of a totally watertight and legitimate way of avoiding the problem he was in. But he still preferred to stick with his existing accountant's totally illegal way of getting round the problem and hope that nothing would arise. Again, he could legitimately point to relying on a qualified accountant. Ca va.

Thanks (0)
avatar
By Anonymous
25th Jan 2007 08:32

I dont think a tribunal
would accept the argument that you were acting on the advice of your accoutant as to why you were deliberately avoiding VAT. Surely, by accepting the advice means 'you' understood the implications of such a scheme and aware of the potential problems.

The whole anti-avoidance legislation has been a huge bonus for HMRC. We read they are trawling council planning notices to see which builders are doing what work and for whom as a means of spotting tradesmen who should be VAT registered but do the old 'client buys the materials I just charge for labour' gambit, etc.

HMRC can argue for a retrospective registration if they consider a fraud has taken place - but I doubt they'd ever be able to prove that sufficiently to win - despite my reservations as above.

Thanks (0)
avatar
24th Jan 2007 15:32

Just some comments
If it is just the husband on his own who carries out the work, he must be going some to get to the VAT registration limit! Unless, that is, he charges considerably more than they do here in deepest Suffolk.
Does he have just the one car for work? How does he decide which company he is working for at ony one time?
Are the two companies set up with exactly the same directors and shareholders?
Why is he looking to change accountants? Not satisfied with the one he has at the moment? The client must be tearing his hair out, all that extra admin etc.!
It all sounds very fishy to me; perhaps just a way to get two fees (and company ones at that) out of one client! But, hush my mouth, surely not a Chartered Accountant!!

Thanks (0)
avatar
By Anonymous
24th Jan 2007 16:13

Just a thought............
.........but I think that I am correct in saying that if HMRC decide that they are in fact one business artificially separated then registration would have to take place from that point onwards - not retrospectively.

So presumably, if your (potential/lost) clients think that they are acting in a proper manner with no avoidance in mind, they could carry on as they are until maybe challenged by HMRC.

Thanks (0)
avatar
By Anonymous
24th Jan 2007 15:06

In my opinion...
the forming of two companies to avoid registration is not illegal as such, the problem will be in convincing HMRC that the structure of the two businesses is not such as to come under anti-avoidance legislation.

For true seperation to take place one would want to see different company names/different advertising and marketing (ie, not one website) and they certainly would need seperate bank accounts and sets of accounts as well as inter-business activities to be a minimum (ie, if they are two seperate companies you would not expect them to share overheads such as elec/gas for instance but instead have seperate billed costs for each company, etc). If being run from home, like most small driving schools, then it would be difficult to seperate those overheads. Also, are cars being used across company (ie, if they have one car each and one breaks down, do they share the car, etc - I don't think they've done enough to seperate the two entities to be honest.

It does sound to me that HMRC would have a field day, purely becuase they are carrying out the same business under the same name(s), website and are each director/secretary of each other's business - although it would be for HMRC to prove this in court. The current accountant is unlikley to tell a competitor how bad his advice has been and on the face of it, is acceptable advice...provided the client understands the inherent risk of such a set-up and try thard o make as much distance from each business as possible - but this doesn;t quite sound the case here.

Can't comment on reporting it to anyone, as ultimately the scheme is not illegal, just open to attack from anti-avoidance laws. Give it time and the HMRC anti-avoidance teams will catch up with them, as it's a new revenue stream for them to chase up.

Thanks (0)
avatar
29th Jan 2007 09:15

Within the law
Technically, provided the Client does, as a matter of fact, create 2 separate businesses then each can trade below the VAT registration threshold and avoid VAT registration.

However, HMRC will use many factors to try to show that 2 separate businesses haven't been created: shared staff, shared advertising materials, contracts for sale etc..... If they succeed in showing there was never 2 separate businesses they will apply the VAT registration retrospectively. This is why I said the advice in the instant case was correct but may not have been implemented correctly.

Even if 2 separate legal entities have been created, HMRC could still apply an aggregation ruling forcing the 2 entities to be treated as 1. As this is not retrospective there is not financial penalty when this is applied.

Regards

Paul Taylor
Senior VAT Consultant
http://www.dains.com

Thanks (0)
avatar
By Jayner
21st May 2010 14:08

Very interesting discussion

... especially the point about whether it can be retrospectively applied or not.

I am a humble student revising for an Indirect Tax exam on Monday, but feel fairly sure that what Paul said is correct - ie that the crux of the matter is whether HMRC can convince the tribunal that two businesses were never in fact sucessfully created. In the Inn House case that we studied in class the tribunal ended up by saying "We are not prepared to say that the attempt to set up a separate business was a failure. It is a real business, which makes real profits for Mrs Greenland alone, in relation to which she made proper tax returns to the Inland Revenue. We therefore allow the appeal etc"

hope that helps!

Thanks (0)