Can you divide and conquer?

Can you divide and conquer?

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Father and son, electricians, trade through a VAT registered private limited company taking a combination of salary and dividends.

They are losing out on a significant amount of work to competitors who are not VAT registered.

They want to keep the company, for work to be done for VAT registered customers, and form a second trading entity, which would not be VAT registered, to enable them to compete for work where VAT would not be involved in the price quoted.

Clearly, under the aggregation rules, same proprietors, operating from the same premises, using the same equipment, HMRC would simply consider the two businesses to be one.

If, however, the son was to sell his shares in the existing company to his father and start a new non-VAT registered business with a new name and from his own address, would this provide sufficient distance to avoid the aggregation rules?

Or, is there a second risk that HMRC might argue that this was a continuation, albeit in part, of an existing business which would have to be registered regardless of the certain fall in turnover to well below the threshold?

If the new business does not have to be registered and should also avoid the aggregation rules, then, depending upon how the work arises, were the father to help the son, or vice versa, presumably as an employee of the other for any such work, could this be interpreted by HMRC as evidence that the businesses essentially remain as one?

Many thanks to anyone leaving their thoughts on this matter.

 

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Accountants Northampton
By Shamrock
22nd May 2015 08:31

make hay while the sun shines
As long as the businesses are completely separate entities (ltd + ltd or ltd + sole trader) and treated as independent businesses with there own records, name and advertising then there shouldn't be a problem.

Any transfer of services or consultancy work between the two needs to be cross charged for at open market value.

Theres always the risk that HMRC could order the businesses combined for the purposes of VAT later on but as long as they cant prove artificial separation then there is no risk for back taxes.

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