We all know about the man in the pub who 'does his own books' and doesn't pay any VAT to the Tax Man and gets all his VAT back, it sounds too good to be true and that is because it is - he is usually lying or fraudulent.
But then there is the woman in the pub whose accountant told her to split her business in two so that she falls below the VAT registration threshold and she doesn't have to pay any VAT. Unfortunately the latter is more common than you think and often traders find themselves in an extremely weak and vulnerable position if challenged by HMRC.
We expect many of you have experiences of taking on new clients where you feel the structure just doesn't look right from a VAT perspective or even worse you are left to pick up the pieces from a challenge regarding artificial separation. Hence the crux of this article is to give you a steer in the right direction and to give you some pointers on what to look out for.
The difficulty that we have is that a large amount of HMRC commentary in this area is withheld to protect the Revenue therefore it is an area that is often difficult to manage. When considering whether disaggregation of a business has taken place, HMRC look at a number of factors, there are no hard-and-fast rules that can be applied to determine whether what are asserted to be two businesses are in fact one, however there are a number of points for consideration:
- Do the businesses have separate accounting records and financial statements?
- Is there any commercial relationship between the businesses, if so, is this at arms length?
- How are overheads, rent, insurance, council tax etc dealt with? Are they invoiced to each business or is there a method of apportionment?
- When advertising, are separate adverts placed by each business?
- Could one business exist without the other?
- Do the businesses share equipment or is separate equipment used by each business?
If it is evident that there are financial, economic and organisational links between the two businesses it is likely that your client could be open to challenge from HMRC. We therefore recommend that you look critically at your portfolio to identify any arrangements your clients have in place to understand whether any changes need to be made to their operation/administration to strengthen your client from challenge.
A challenge from HMRC that a business has been artificially seperated can only be applied from a current point going forward. However, in some cases HMRC may seek to implement backdated registrations which can result in significant assessments causing many businesses to fold. It is possible that HMRC could seek a backdated registration if they successfully argued that that two people operating separate businesses was actually a partnership operating one business.
We are seeing a rise in the number of cases referred to us in this area, if you would like to discuss any clients where you have concerns or if you have any current challenges from HMRC, please do not hesitate to call our helpline on 0870 420 8971 for a no obligation initial discussion.
Lindsay Gibbons is a VAT consultant at The VAT People. She can be contacted by clicking here or via The VAT People’s free helpline on 0870 4208971.
David Miller is a Director at The VAT People and he can also be contacted by clicking here or on 0870 4208971.