So following the budget confirmation that rent a chair income is a supply of services and therefore counts along with hairdressing turnover towards the registration threshold, I have a lot of panicked clients ringing me up.
It occurred to me that if an individual rents a shop and supplies facilities to a sub-lessee under rent a chair, if this was done as a sole-trade for example, and the hairdressing business was incorporated, do we not have two separate legal entities providing two different trades, therefore not subject to aggregation rules?
Thanks for any opinion.
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I'm not sure I get you
Are you saying A Ltd could own a salon and let a chair to Mr B, who would then let the chair onwards, thus attempting to seperate the streams?
I can't see that that would work, surely that is artificial seperation, just adding another layer.
Not quite no - that would be artificial. I'm saying that if Mr A rents a building from a landlord and provides serviced office space to companies including a certain B Ltd, his own business, which is a book-keeping company say, then clearly, these are separate trades for VAT turnover purposes.
So in terms of hairdressers, I'm saying if Mr A rents a shop from a landlord and pays the utilities etc, and then rents chairs to B Ltd (his own company) but also individuals Miss C and Mrs D, then I would have thought the individuals supply of facilties in his own name is separate to the trade of hairdressing carried on by his limited Company B Ltd.
Under VAT aggregation rules, if he operates various self-employed businesses, they are aggregated for turnover purposes no? But if his hairdressing business is a Ltd company and rents facilities from him as an individual, as does Miss C and Mrs D, then these are separate for turnover and VAT threshold for registration purposes.
Or at least as far as I could see?
"Artificial separation"
One thing HMRC will look at is whether any separation is 'artificial' and done purely to avoid VAT. So the fact that they're in different legal entities doesn't automatically stop them being combined. The disaggregation rules [Para 2, Sch 1, VAT Act 1994] allow for different persons (i.e. legal entities) to be combined, if HMRC can demonstrate that the splitting of one set of activities (running a salon and renting chairs) is artificial when it becomes the work of two entities (Mr A and B Ltd).
So if this was the true set up undertaken for a variety of reasons, such as risk management/asset separation, accounting reasons, partnership splits etc. then no problem, HMRC don't have a leg to stand on, as long as everything is separate, separate invoicing to Mr A and B Ltd, separate bank accounts, separate employees, phone numbers etc, without the trades supporting each other financially or organisationally.
However if this reorganisation of the business suddenly lines up with a change in VAT liability and the only real effect it has is to split out two intertwined businesses to avoid VAT charges on one part of the business, HMRC are likely to start looking at it as artificial.
So even with a SP and a Ltd, the clients could still find themselves fighting a ruling that says a) the split is artificial and has never been done properly, so VAT from day one, or b) the split is artificial but has been done properly, so we'll treat you as one entity from this point forward.
The be all and end all isn't necessarily 'are these different trades being undertaken?', a pub and a restaurant are potentially sepaprate trades, but that doesn't stop HMRC aggregating them if the split's been done to avoid VAT. Basically when HMRC come calling you've got to be able to justify taking something that's currently one business and splitting it into several with a phrase that begins with something other than "well when the VAT rate changed we thought..."
However that being said it's by no means impossible and is certainly a lot easier than splitting out a pub and restaurant on the same premises. There would hopefully be a fairly good case with many of these, but you would have to bear in mind the cost of setting up the leases, who will have responsibility for repair and maintenance etc, as anything that is the responsibility of the building owner will not be recoverable for VAT purposes. Then if you transfer too much of the landlords responsibility to the tenants or especially one tenant then this would be fodder to HMRC in proving artificiality. Also if you place responsibility under the lease on Mr A without placing similar responsibilities on Mr C and Mr D, then this would also look artificial.
So you can't sell this to clients with 'we can do this so that nothing really changes', if this is to be done properly then things would need to change, and it would have a cost in both setting it up, and ongoing loss of input tax (although some of that may have been lost anyway through the partial exemption rules under a sole trader reg so swings and roundabouts there.)
So some food for thought and I hope it helps