A sole trader has two distinctly separate businesses 1) cleaning and 2) drainage repairs, where the combined turnover is nearing the VAT threshold. Can the requirement to register for VAT be avoided by incorporating one business and leaving the other as a sole trade? There is no connection between the two businesses and separate records are maintained. The sole trader does not wish to register for VAT because this would increase his prices making him uncompetitive.
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Disaggregation
'There is no connection between the two businesses!' - yes, there is! A Sole Trader!
Given that the two businesses are distinct in the type of services they offer, then it would be worth incorporating one or both. I would comment that if some customers deal with both businesses, then HMRC may take that as an indication of an artificial separation, and take action against the client.
Not correct
They are not separate legal entities. There is no legal distinction between a sole trader and his trade so it follows that there is no legal distinction between the two trades. If one of them was a company or a partnership, you would be correct, but not if they are both sole trades.Many thanks for your reply. Does this mean that HMRC can consider the combined turnover of the two businesses and ignore the fact that one is a separate legal entity? Would I be correct in thinking that if they take the view that it was artificial separation they can only direct that VAT should be applied from the date that they made the discovery ie not applied retrospectively. If they take the view that there has been artificial separation, are there any penalties that can be applied for failure to register or setting up an artificial structure?
HMRC powers in this scenario are two fold.
FIRST (no back-dating of assessments / registration)
HMRC can issue a direction that the two entities are one for VAT purposes, quite wide-ranging, but the good news is NOT back-datable. Effective from the date of direction onwards only.
SECOND - back dated assessment
This is the nasty one, but HMRC effectively have to prove that only one entity was trading and having two activities portrayed as one entity carrying them out - in effect a "sham". Properly set up (*) HMRC will not succeed with this one.
(*) "Properly set up" means actual separate legal entities, each with own bank account, each entity carries out a defined activity recorded in its own records. Legal niceties being complied with are a necessity (Such as registration with HMRC for IT / CT from the purported date of the activities "going separate ways"; business names disclosure regulations complied with, all paperwork and publicity impeccably correct - invoices, order forms, price lists, websites and advertising).
Properly set up
My phrase "properly set up" is my own - not a legal term, just an appropriate phrase to ring alarm bells to those who think everything is easy.
"Properly set up" in my view, means reducing the risk of attack as follows:
Each legal entity to have separate defined activitiesDiscipline to ensure that activities, as properly defined, are only undertaken by the defined entityTotally separate account booksTotally separate bank accountsNo "back-dating" / no re-writing of recent or older past history - the split to be from a defined current date and documented at the time (eg. partnership agreement, eg. start of partnership [or Ltd Co] bank a/c)Avoid a single supplier invoicing the wrong entityComply with business name disclosure requirements at trade premises and in correspondenceSeparate advertising for each entitySeparate website (if any) for each entitySeparate 'phone numbers and eMail address for each entity (and I hope who answers the phone gives the correct business name to the caller who could be from HMRC!)Separate payroll scheme for each entityEach entity to bear its own costsLiability insurance policy for each entityCustomers must pay the correct entity - no crossover bankingsOne entity should not pay suppliers of the other entity
I expect, in the above quick summary, that I might have missed a few points, then again there might be some who might conversely say that what I've stated is OTT.
If what I list above seems burdensome, then do a cost-benefit exercise to see what the extra costs are vs. the VAT to be saved. Some might be tempted to short-cut on the advice to save costs, but I can't endorse that strategy instead I'd say "that's increasing your risk of attack".
PS. The biggest case that I had where HMRC attacked it had a 6 figure amount of VAT involved, the client was ultimately successful (and HMRC didn't even later try the artificial separation trick either!).
Hi Rangra
As it is a few years down the line can I ask whether this advice turned out to be fine with HMRC please and if it still applies.
Peter
Hi Rangra
As it is a few years down the line can I ask whether this advice turned out to be fine with HMRC please and if it still applies.
Peter