Failing Artificial Separation

Failing Artificial Separation

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Limited Company  has 2 closely related trading activities. Directors wish to exclude one trading activity from the Limited Company so they don't need to charge Vat. Put it through as a sole trader. No business reason for separation other than avoiding Vat.

This will be artificial separation e.g same premises , same director/sole trader , same employees , common customers etc , same overheads etc.

Penalties that would be applicable would be Vat would be due on the income diverted to the sole trader plus potential for up to 100% penalty.  Deliberate Avoidance.

However I have reviewed other articles which have put forward that where a business fails the artificial separation test  then no back tax will be due e.g action will not be retrospective & additional vat will only be applied from the time of any HMRC challenge.

To me any such arrangement would probably be correctly viewed as a sham.

Am I correct in my assertion that back tax & penalties will be applied?

Replies (6)

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chips_at_mattersey
By Les Howard
14th Apr 2013 18:16

Disaggregation

HMRC have two options:

1. simply assess for back tax, plus penalties, on the basis that there was only ever one business; or

2. issue a Notice to aggregate the two (or more) businesses. This cannot be back dated, hence the comment you have heard.

Which will HMRC apply? Whichever will generate more revenue!

(I am interested in your comment about the penalty of quantum. To split the business in the way you describe might certainly be treated as deliberate, with a penalty of 70% or more.)

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Replying to Duggimon:
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By boswell76
14th Apr 2013 18:45

I can't see any commercial justification for splitting the business other than avoiding Vat, So it  would be viewed as deliberate.

On that basis I think back tax & penalties would be applied rather than a notice to aggregate.

Information on how  HMRC actually apply this in practice is always interesting to hear.  

 

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Replying to sachinkhanna32:
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By mikeyban
14th Apr 2013 19:06

I totally understand but my opinion sometimes is avoiding VAT legitimately is a genuine business decision.
Just out of interest what are the activities that are closely linked and how close are they?

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chips_at_mattersey
By Les Howard
14th Apr 2013 19:45

Diaggregation

HMRC have some information at http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm.

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By boswell76
15th Apr 2013 08:36

The related activities are cleaning services & other property services e.g repairs 

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By justsotax
15th Apr 2013 09:14

Rather than looking at

whether there is justification to split the business perhaps you should take the view of whether if the businesses were split the Revenue could justify that the businesses are related for vat aggregation purposes.

 

For example some may suggest that cleaning services (hoovering/ironing etc) are not the same as building services (plastering/painting/plumbing etc) - potentially two very different skill sets and certainly not ones which you would see as complimenting each other (unlike say accounts and bookkeeping or building maintenance/construction)

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