Artificial Separation for VAT?

Artificial Separation for VAT?

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2 Limited Companies

These are new clients to me. The previous accountant has never discussed the possibility of artificial separation with them - maybe rightly so?

Limited Company 1

Is VAT registered.

Supplies capital equipment to vets & dentists.

Turnover currently below the VAT threshold (approx £60k) but has been as high as £120k in recent years.

Wife is the sole Director & shareholder.

Husband does the work - sales, installation etcetera.

Wife does paperwork.

Nobody takes a salary.

Limited Company 2

Is not VAT registered.

Repairs and maintains the type of equipment supplied by Company 1.

Turnover circa £60k and has always been below the VAT threshold.

Husband & Wife are both Directors.

Husband does the repair & maintenance work.

Wife does the paperwork.

Husband takes a salary.

Husband is sole shareholder.

This is the "bread & butter" business.

Other factors

Both businesses run from the same residential address.

Same telephone number.

Separate accounting records & bank accounts.

Husband reclaims ALL mileage through the Maintenance business even if it is supply & installation work.

Only the Maintenance business has a website but that website refers to the provision of supply and installation.

The client has openly admitted to me that the main reason there are 2 separate businesses is that his customers expect VAT (which they cannot reclaim) to be charged on large capital expenditure but would be loathe to pay it on smaller maintenance charges.

Advice Required

Is this set up OK or do they need to be consolidated?

If they need to be consolidated under the present set up, are there any other steps that they could take to avoid consolidation?

If they do need to be consolidated and there is nothing that can be done to avoid this, do they have a historical liability / problem or would you just close the non-registered business as soon as and account for VAT on all transactions going forward .

Any advice gratefully received.

Replies (2)

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chips_at_mattersey
By Les Howard
13th Mar 2014 21:16

disaggregation

Thank you for providing substantial information.

The two businesses deal with the same customers, the supplies are strongly related. There are strong organisational, financial, economic links. And there is a loss of VAT as a result of the arrangement.

I think they should be consolidated. 

Should you amend the historic position? Probably not, as the two businesses did operate separately. But HMRC may take a different view, of course!

Thanks (1)
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By young ronaldo
16th Apr 2014 18:54

Apologies for not thanking you for your reply sooner Les. Kind regards, Mark

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