VAT and CT issues on splitting of business

VAT and CT issues on splitting of business

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Company A is VAT registered and rents an industrial unit for the purposes of running a business.

There is the opportunity to take on the unit next door (for use in the same business effectively)

The director has been advised that in order to still be able to have small business rates relief that the unit should be leased by a new company - Company B (of which he wants to be sole director and shareholder also but possibly could bring wife in).  He cannot afford to pay the rates so this is a dealbreaker.

He proposes that company B then rents the unit on to Company A and just breaks even.  I can't see that this is going to be an issue for Corporation Tax but I am wondering about the position for VAT.  Company B would not make taxable supplies other than recharging the rent to Company A, so would pay no VAT. 

Is there some kind of VAT anti-avoidance rule that I should be aware of that prevents this?

Replies (6)

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chips_at_mattersey
By Les Howard
22nd Jan 2016 16:46

Re-charging rent

There is an anti-avoidance provision that prevents the Option to Tax being made where the tenant(s) is not fully taxable. From your comments I would assume that the Option to Tax is required, and that Company A is fully taxable, and the sole tenant. (Assumptions are always dangerous!)

If all my assumptions are correct, then you are unlikely to be caught out by anti-avoidance rules. But, as others frequently suggest, you have the documents reviewed by a VAT professional, just to make sure.

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By WhichTyler
22nd Jan 2016 17:26

Odd...

If small business rates relief is all that is keeping him profitable, I'd suggest that expanding is pretty risky! the maximum benefit is a few £k I think so paying the rent is likely to be more of an issue than the rates....

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By Mr_awol
23rd Jan 2016 01:11

Why is small business rates relief available for the company if is is sub letting the property from a connected intermediary rather than renting it directly?

I must admit I'm not that familiar with SBRR from this angle - and assume that both units have rateable values above £2600 (but below £6000) but surely the sub-let as described won't affect the fact that the end tenant is on the rates bill for both properties regardless.

Unless the second company is intended simply to disguise the actual tenant (company A) and therefore deceive the local authority into thinking that company B is actually operating from the unit?

I'll admit to having just got back from the pub so feel free to point out any obvious errors in the above

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Replying to exceljockey:
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By t1gger
10th Feb 2016 13:16

Lack of info!
Client has stopped replying to email when I said I'd have to seek external advice and there would be a fee for this! It's a new business so is going to make a loss in year 1 but expects to do well going forwards. To be honest he's given me minimal information other than "my letting agent says that this would be a good way to still get the rates relief what do you think?". Happy to hold my hands up and say no idea but I can find out. He's running a fitness facility so just wants the extra space so it kind of smells a bit wrong to me. If he ever replies I will let you know what he says

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By Ruddles
10th Feb 2016 14:10

As always

Vital information missing. Whether or not there is a VAT issue depends on whether or not VAT is being charged on the head rent of the second unit.

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By PCBACFV
10th Feb 2016 14:56

Business Rates demise


Particularly picking up on your last, one thought I had was whether it would be possible to combine the two units into a single business rates demise and which fell within the small business rate relief limits.

You might wish to consider suggesting your client takes advice from a rating specialist surveyor, but it might depend on various matters as to whether both leases are held by the same landlord and the same tenant for the same period, whether there is a single main entrance door to both parts of the premises etc., but I have known it happen. Often rating appeals surveyors will work on a "no win no fee" basis which may be attractive to your client., but he may also be able to  negotiate on this with the "vendor".

This would avoid an artificial corporate structure with all its inherent issues.

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