VAT artificial separation enquiries rise

Changes to the VAT regime are focusing attention on artificial separation of companies, according to The Vat People, who report a rise in queries and cases on the topic.

The drive to simplify accounting for companies beneath the VAT threshold and HMRC's growing attention on potential areas of tax loss are contributing to a surge in interest in artifically separated companies. Splitting a business in two so both fall under the threshold for VAT and so avoid registration is one of those bits of saloon bar advice that can rebound on those tempted to try it.

In the past year, for example, tax tribunals have decided cases such as AD and J Forster v HMRC [2011] UKFTT 469 (TC01319) in favour of the taxpayers, and Patrick and Patrick v HMRC [2011] UKFTT 865 (TC), which the tax department won.

With artificial separation in the firing line, experts from The Vat People recently published a guide to identifying clients that had artificially separated their companies. In HMRC's view artificial separation happens when:

  • The same businesses use the same equipment or premises regularly
  • The business supplies both registered and unregistered customers
  • A single supply is separated, for example one entity in a bed and breakfast supplies bed and the other breakfast
  • Artificially separated businesses maintain the appearance of a single business
  • The same person controls a number of businesses which make the same type of supply.

The Vat People suggested a number of questions if artificial separation is suspected, or the structure of the business doesn't look right from a VAT perspective

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