Creating a company to legally avoid VAT?

Creating a company to legally avoid VAT?

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Dear AW

I have a potential new client who is a self employed landscaper.   They are doing the right thing and monitoring how close they are getting to the compulsory registration threshold.  However, now that they are getting there he is thinking of ways to legitimately avoid having to register.

I've suggested that he could have his clients buy their own materials, and he could just supply design and labour work which would take the value of his VATable supplies well below the threshold.  He doesn't like this as many clients just won't do that.

It's also been suggested to me elsewhere that if he starts a company, and that company will be a materials reseller that will buy the materials at cost from suppliers and sell it to his customers, and perhaps to other gardeners and landscapers.

He would remain self employed and he would supply design and labouring services as a landscaper.

Would this be two different business for VAT purposes so as to avoid amalgamation when working out the threshold?

M.

Replies (11)

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By andy.partridge
09th Feb 2015 16:25

Sounds like unnecessary hassle

Your suggestion gives your client all the hassle and cost of having a limited company but without the conventional benefits. Is that really better than being VAT registered?

Have you considered having the whole business in a newly formed limited company? At least you can reset the turnover to £0 for a period before mandatory registration kicks in.

Perhaps the limited company income/corporation tax advantage would outweigh the VAT disadvantage?

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By Summerjosh
09th Feb 2015 16:37

artificial separation

I would say this could be an example of artificial separation, these companies can be linked in one way or another, so HMRC may not like that approach. . . There are things of course which can be done to mitigate risk, especially when you mentioned selling to other landscapers - However there still is a risk to be aware of, and you would need to work with the client to route out the risks when performing due diligence around their trading styles.

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By tebthereb
09th Feb 2015 17:16

Why does your client wish to avoid being VAT registered? Admin burden? Cost to his clients? Both? Something else?

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By Michael Beaver
09th Feb 2015 17:40

Because it puts him at a competitive disadvantage to other landscapers in the area who are smaller (or have received dodgy advice) and don't charge VAT.

His corporate clients don't care, but most of his business is to residential housing.

Reading some other links, landscapers are at the top of the list of clients who get done for artificial separation.

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Euan's picture
By Euan MacLennan
09th Feb 2015 17:42

It is only VAT on his labour

As he is not VAT-registered at present, he cannot reclaim the VAT on the materials he buys and so, he is passing on the cost including VAT to his clients.

If the clients were to pay for the materials directly, they would be paying the cost including VAT, so there would be no difference to them.

If he (or his limited company) registers for VAT, he can reclaim the input VAT on the materials and then charges the clients for the net amount plus VAT, so the clients end up paying the VAT on the materials every which way you try to do it.

The only change if he registers for VAT is that the clients will also have to pay VAT on his design and labour charges.  As he is a "landscaper" rather than a mere gardener, I suspect that the materials form quite a large part of his overall charge, so the clients might not find the extra 20% on the non-material element to be too much to pay.

 

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By Michael Beaver
09th Feb 2015 17:59

Euan is mostly right.

Except that materials aren't quite as high as you imagine.  It's about 50% of the total cost currently to his client.  So there's still an overall 10% increase in prices to stay the same.   I'm tempted to tell him just to register, or put the whole thing in a company as andy.partridge suggests, but I don't want to do so if a separation like this is actually legitimate.

 

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By shaun king
09th Feb 2015 18:37

"Many clients won't do it"- buy materials!!

Strange how many clients suddenly see the sense in buying their own material when it is explained that by doing so then save VAT on approx 50% or more of the bill. In reality it is the most sensible option or join the "VAT Club"

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Replying to The Dullard:
By petersaxton
09th Feb 2015 19:37

They are not

shaun king wrote:

Strange how many clients suddenly see the sense in buying their own material when it is explained that by doing so then save VAT on approx 50% or more of the bill. In reality it is the most sensible option or join the "VAT Club"

How are they saving VAT?

They will only save VAT on the labour and that is only if enough clients buy their own materials so that VAT registration is not needed.

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By Michael Beaver
09th Feb 2015 20:14

It's more the hassle of it.  Most clients employ a landscaper because they want someone else to just take care of it for them.  They don't want to be travelling around, organising materials and delivery.

That's how I would be because at the point I'm making the decision, the landscaper is either VAT registered or he's not and it won't matter whether or not I choose to buy my materials or not.

 

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By zebaa
09th Feb 2015 20:34

Do the Calc. Maybe have a holiday.

You could do some calculations to show how much being vat registered may cost him. Include flat rate too and also do the same for various customer 'drop out' rates. He may find that going on holiday (not earning, not VAT registered) saves him money.

 

 

 

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By shaun king
09th Feb 2015 20:41

I said that

@Peter Sexton

Exactly - 50% of the turnover (materials) is excluded from turnover - so no registration and VAT is saved on the labour. As the OP says the competition are doing it so the client has a simple choice - doesn't he?

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