Hi and thanks for looking at this.
I am a very worried Director. Please bear with me while I try and explain the situation. I appreciate your time. i know this is all very cagey, because i dont want to be identifiable by this post, but let me try and give you a description of what is going on.
Some years ago i opened a second, separate company, the idea being to split my business for domestic and commercial clients.
My accountant told me that this is ok, and he does the books for both companies. he is fully aware of the situation, and we have conversed by email and phone many times regarding it
About a year ago i happened to be talking to another accountant. I told him what i was doing, he said thats a real no no. I then spoke to another accountant who said that it sounded ok. so 1 for sure, 1 not sure, 1 against.
Since then i have tried not to think about it but i'm getting so stressed over this now that i cant let it go on any longer.
I've read many things about the rules for doing this and I still don't really know what to think. In the end I guess it doesn't matter what I think, but what the HMRC decides.
i have 2 companies, lets call them A and B.
Company A
1) Ltd company
2) Incorporated say 10 years ago
3) Vat registered for say 5 years ( I also opened company B around the same time as A went VAT registered)
4) Services charities, sole traders and businesses, basically, if you have a business name, then you are serviced by this company. It works for VAT registered and non VAT registered companies and sole traders. There aren’t that many non VAT registered customers, but there are about 15%
Company B
1) Ltd company
2) Incorporated say 5 years ago
3) services domestic customers, none of the customers are vat registered.
4) Has never been VAT registered
I am the sole director of both companies.
Both registered to the same address. That address is my home address,
I have a workshop there, which customers of both can come to.
About 50 % of the turnover of both is made up of labour, that is further split to about 30% in the workshop and 70% on site at customer premises.
They both turn over about the same amount each year.
Due to the nature of my work, I sell a lot of the same kind of items to both sets of customers, although there are things that sell to the business customers that are way more expensive and numerous than domestic customers. Some of the things I sell to business customers I would never sell to a domestic customer.
The level of skill required to deal with company A customers is far above that of company B.
Some of the items I sell to both sets of customers are discounted for domestic customers.
The labour rates are currently set at and £x/hr + VAT for company A and £x/hr for company B and have been for many years. (where x = x). I have wanted to change this for a while now, so that business labour is more expensive, but haven’t felt the market was right for it.
I have separate bank accounts for each company.
I have separate accounts for each company.
The invoices and quotes I send out are distinctly from each company, with the correct company number etc on them.
The company logo is the same for both, simply because I like it.
The terms and conditions of business are the same for both companies, simply because I have never bothered to change them as I think they are fine and equally well apply to both sets of customers.
A doesn’t really advertise except for mailshots that I did for a few years about 4 years ago. A tends to get customers because they are originally a customer of B, and they either need help with their business or their employers business.
I only have one website which really is for company B. It does say that we do both domestic and commercial on it. If someone calls and they are clearly a business customer, I tell them that we run a separate company for that and explain the differences in price and service.
Business customers get preferential treatment for issues in terms of fix time for an issue.
A buys all the parts, simply because it is easier. B buys what it uses at cost from A about every 3 months by the sending of a (VAT) invoice from A to B
Lets say that over the course of its existence, within the last 6 years, company B has turned over £250k.
What I would like to know is:
1) Is HMRC likely to see these as separate?
2) If not:
a. Are they likely to be able to retrospectively charge VAT
b. If they retrospectively charge VAT, will they charge interest and at what rate
c. If they retrospectively charge VAT, will it be mitigated by the VAT that I could have claimed back if it was actually VAT registered? (it buys all its parts from company A which is a VAT registered company, and so has VAT receipts for everything it buys)
d. If they retrospectively charge vat, will this be mitigated by the corporation tax man etc, as the amounts that I would have paid would be lower
e. for how many years can they retrospectively charge VAT?
f. can i get fined or go to jail for this if they decide i am committing fraud?
3) what should I do? I don’t want the sword of Damocles hanging over me for ever.
I really appreciate your time and thanks for reading and hopefully providing some guidance.
Replies (44)
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i am also in the against camp
There are many grey areas in accounting where you can have one accountant taking one view and another taking the complete opposite but for various reasons they can both justify that they are correct.
Based on the information you have given I would say you are operating one business for the following reasons
1. Business B was opened at the time business A became VAT registered. What was the reason for this other than to avoid VAT for business B customers as assume before then both types of customers went through the one company.
2. The businesses run from the same premises, same registered address, use the same website and effectively sell the same things. The only difference is that one customer base is VAT registered and the other isnt.
Regarding the queries you have raised that is something would recommend going to seek independent specialist advice which you would need to pay for. Would recommend speaking to a VAT specialist (there are plenty out there and your current accountant might know one they can recommend).
You could always ask HMRC to do a visit. If you are confident that everything is ok then you shouldnt have anything to worry about but I would.
Maybe
One issue here surely is whether HMRC could argue there was ever only one business. If they can, they can go back 20 years. If there are however separate businesses, but they are commonly controlled etc, HMRC can issue a direction that they must be seen as one. This can only be done going forward.
I would also add that I have also queried in my mind whether HMRC could ever say a limited company is not a separate business, being a separate company on the companies house register.
Sorry, the questions are too detailed, but don't give up hope - it CAN work and I would strongly advise you to get professional help.
Good luck!
Wayne
Against
1 Is HMRC likely to see these as separate?
NO. THERE ARE TOO MANY THINGS COMMON TO BOTH BUSINESSES: YOU, PROPERTY, ETC.
2) If not:
a. Are they likely to be able to retrospectively charge VAT
HMRC WILL TREAT THE SALES AS INCLUDING VAT
b. If they retrospectively charge VAT, will they charge interest and at what rate
THERE WILL BE PENALTIES AND INTEREST
https://www.gov.uk/vat-returns/surcharges-and-penalties
https://www.gov.uk/vat-returns/interest-on-underpaid-or-overpaid-vat
c. If they retrospectively charge VAT, will it be mitigated by the VAT that I could have claimed back if it was actually VAT registered? (it buys all its parts from company A which is a VAT registered company, and so has VAT receipts for everything it buys)
YES
d. If they retrospectively charge vat, will this be mitigated by the corporation tax man etc, as the amounts that I would have paid would be lower
YOU’D HAVE TO ALTER YOUR ACCOUNTS AND TAX RETURNS IN EACH YEAR IF MATERIAL AND MAYBE ONLY WITHIN THE FOUR YEAR LIMIT
e. for how many years can they retrospectively charge VAT?
FOR THE YEARS YOU SHOULD HAVE BEEN CHARGING VAT
f. can i get fined or go to jail for this if they decide i am committing fraud?
SEE THE ANSWER TO 2 B
IF THEY DECIDE YOU ARE COMMITTING FRAUD YOU COULD GO TO JAIL BUT IF YOU REPORT TO HMRC IT WOULD BE OBVIOUS YOU HAD MADE A MISTAKE
3) what should I do? I don’t want the sword of Damocles hanging over me for ever.
GO TO AN ACCOUNTANT AND EXPLAIN THE SITUATION
IF YOU SHOW YOU HAVE GOOD RECORDS YOU SHOULD BE ABLE TO GET A QUOTE OR AT LEAST A GOOD ESTIMATE
GIVEN THAT YOU CAN CLAIM BACK VAT FROM PARTS BOUGHT FROM COMPANY A AND CORPORATION TAX SHOULD BE REDUCED THEN I THINK YOU WILL FIND THE SITUATION IS NOT AS HORRENDEOUS AS YOU MAY FEAR
Two companies one VAT registered
I believe that HMRC would be unlikely to see these as separate companies. For their rules it is the entity that runs the companies that would link them irrespective of the supplies they both provide.
This may not apply in the case in the case of two totally different businesses, for example, a husband & wife partnership operating a VAT registered cafe, where the husband also operated as a sole trader as a painter & decorator and was not VAT registered.
2 companies
Peter has it in a nutshell. Yes there will be interest, and penalties, but the maximum penalty can only equal the interest. This will be partly mitigated, just by pointing this out to them. The penalty is further reduced by a number of other factors, co-operation etc. Once you have admitted the error,it can only be treated as error or mistake not fraud..
First of all i would like to point out i am not a professional just a student, however would like to point my opinion.
It is clear that company B is opened in order to avoid the VAT. (I am not saying that you did that, however it looks like that) However i gues legal tax avoidance is not a crime.
Questionable area is, both companies operate from the same WEB adress, sells the same products and company B buys goods from company A. I guess audit would look whether company B benefits from company A in term of VAT or any other. If company A charges VAT invoices from company B, and owner of both companies can prove that there is no benefitial interactions so i guess it might work out. If businesses can be proved as seperate entities, i guess HMRC would not be able to charge any fees no matter whether they clearly see that another company is opened in order to avoid VAT or not. Am i right?
You are wrong
"I guess audit would look whether company B benefits from company A in term of VAT or any other. If company A charges VAT invoices from company B, and owner of both companies can prove that there is no benefitial interactions so i guess it might work out. If businesses can be proved as seperate entities, i guess HMRC would not be able to charge any fees no matter whether they clearly see that another company is opened in order to avoid VAT or not. Am i right?"
Totally wrong.
You have to go by the rules rather than make it up.
Turnover
if both companies have similar turnover the haven't they both breached the VAT threshold anyway (regardless of whether they are separate businesses or not)
Agree with comments above
Splitting a company for the sole purpose of splitting business and private customers would probably be viewed as VAT evasion. The fact that you operate the same trade, serviced the type of customers of company B from company A originally, use the same logo, website, premises, suppliers and employees (ie. yourself) , is just giving HMRC more ammunition.
I think this would be seen as evasion, rather than avoidance, albeit not the worst case of evasion seen by HMRC. Your main defence would be that you took professional advice before splitting the business. This could well get you off the hook, but only if you can prove you were given duff advice, or your accountant admits his error. You must also act to correct the situation rather than carry on with the knowledge that the advice given was wrong.
An alternative would be to change the ownership & directorship of one company, but even then I feel you would be on dodgy ground as the companies are not operated separately, but are intermingled.
You were right to question the advice given originally, and this would go in your favour. You now have the opportunity to put it right.
Agree that there is a risk HMRC won't like it
I would agree that HMRC would certainly not like the arrangement. The point is whether you can rely on HMRC issuing a direction going forwards or whether they would be able to assess.
As mentioned above, you don't mention the combined turnover of both businesses? I am assuming that the combined amount is above the VAT threshold?
Clearly you are uncomfortable with the position, so my first thoughts would be that you should stop the arrangement going forwards. At least that way the problem isn't getting any bigger.
The next step would be to get an Accountant who is experienced in these matters to review the position in an balanced approach.
They can then advise of whether you should contact HMRC to disclose this (and can assist in he process) or whether you have a risk of challenge but have sufficient documentation to defend any challenge.
Clearly the advice will need paying for, but you will get advice which is from someone who will look at the facts without having an interest (ie the person who helped you set it up!)
Have you had a VAT visit in the last five years?
Doom Mongerers
I would agree that HMRC would certainly not like the arrangement. The point is whether you can rely on HMRC issuing a direction going forwards or whether they would be able to assess.
As mentioned above, you don't mention the combined turnover of both businesses? I am assuming that the combined amount is above the VAT threshold?
Clearly you are uncomfortable with the position, so my first thoughts would be that you should stop the arrangement going forwards. At least that way the problem isn't getting any bigger.
The next step would be to get an Accountant who is experienced in these matters to review the position in an balanced approach.
They can then advise of whether you should contact HMRC to disclose this (and can assist in he process) or whether you have a risk of challenge but have sufficient documentation to defend any challenge.
Clearly the advice will need paying for, but you will get advice which is from someone who will look at the facts without having an interest (ie the person who helped you set it up!)
Have you had a VAT visit in the last five years?
I agree. Stop now. I have seen numerous examples of HMRC then deciding they WOULD have issued a direction but cannot now. Ie they accepted there were two businesses but they were loosely bound by operational, organisational and financial links (note all 3 need to be met). Just enough may have ben done to make them separate businesses. They are separate Ltd Co's.
I know the position could be dire. If it was up to some people here, the questioner would pop some handcuffs on and take himself off to the nearest Police Station. But if you are at the bottom of a hole, there's only one way to go!
Keep battling
Registering for VAT
"As mentioned above, you don't mention the combined turnover of both businesses? I am assuming that the combined amount is above the VAT threshold?"
That's not important if one business has registered for VAT because then BOTH businesses should be registered.
Clarification on one point
"As mentioned above, you don't mention the combined turnover of both businesses? I am assuming that the combined amount is above the VAT threshold?"
That's not important if one business has registered for VAT because then BOTH businesses should be registered.
Not so, Peter - it is important. Anti-avoidance will not be invoked if registration is entirely voluntary (ie if total taxable turnover is below registration threshold). But in this case we're told that combined turnover is above the threshold.
Artificial Separation
If you google 'HMRC Statement of Practice 4 : Artificial Separation', you can find HMRC's policy, including 'What HMRC will consider to be artificial separation', ('Separate entities supply registered and unregistered customers' is No.1 on the list), and 'How the measures will apply' (existing vat registrations will be cancelled and an amalgamated business registration will be created instead).
HMRC comment that they will give a decision when faced with an actual situation, (as opposed to a proposed structure), so this might be a good route to try.
Your accountant can appeal if he is confident of his reasons for approving the split, but it looks like an error on his part.
You were not at fault, as you acted on professional advice, but now that you are aware of the facts, I think it would be vat evasion if you didn't address the situation.
They are separate Ltd Co's.
If that was all that was needed then it would be easy to avoid VAT registration.
It is true that HMRC can make some strange decisions but on the whole the answers above appear reasonable. Maybe the OP should write to HMRC setting out the facts and explain why they didn't register and see what HMRC suggest?
http://www.hmrc.gov.uk/manuals/vatdsagmanual/vatdsag08350.htm
Is an interesting case though!
You have to love Fawlty's post, ending with 'in short'.
There was nothing short about that my friend.
Motivation
Perhaps, in the end, look to your own motivation as to why you split the companies.
If vat issues were part of your motivation, that might also be obvious to HMRC, take a more compliant view from now on.
If vat is irrelevant, and you want B to be separate even if it also needs to be registered in the future, then you could carry on, but you might have to argue your case with HMRC.
What is the honest answer
as to why 2 Companies exist?
Can the OP give us a completely honest answer as to why there are 2 Companies?
Other than the glaringly obvious, i'm struggling to see why anyone would bother to go through the administrative heartache of having to run 2 separate Companies?
Basil's points
I have researched further after reading Basil's points. Usually I agree with Basil. In this case he has made some valid points that show I was wrong but I can't agree with his general conclusions.
It does indeed appear that HMRC have to decide that the present situation is wrong. This seems to allow businesses to be set up to avoid being VAT registered and the worst that could happen is they would be forced to change in the future.
I think the OP is wrong to only issue inter-company invoices after periods as long as three months and without any set dates. I would do it at least for complete VAT quarters.
The OP has set out so many activities that makes it one business with only an artificial separation.
Answers
"could you share with me the links to the info that shows that Basil is correct please?"
This was referred to earlier in the thread.
https://www.gov.uk/government/publications/statement-of-practice-4-1983/...
"forgive me , also i can read your post 2 ways - do you mean
1)that the current legislation is wrong, and should be changed in order to prevent me from doing what i am doing
2) that what i am doing is not compliant with the current legislation"
1
"Thirdly, what difference would it make if the vat is paid in q1 or q2 as long as the vat is paid? it all come out in the wash. although it would be easy for me to do as you suggest, i dont understand what difference it would make."
No difference at all EXCEPT your VAT returns are wrong and there is a delay in payment.
If you think it's right then people could enter anything in any return and correct it in the next return. I am of the belief that you should make some effort to get your returns correct.
The link
Hi Basil,
Sorry, id completely forgotten to mention you in my last few posts.
thankyou very much, and to everyone else who has taken the time to post here.
Is anyone able to contradict Basils arguments?
I think the link I quoted contradicts some of Basil's arguments about separation.
The overall gist of the link
seems to say: "Do what you want but if we find out we may get you to change in the future"
Here is where I disagree
"I think the link I quoted contradicts some of Basil's arguments about separation."
I think a lot of the facts indicate that HMRC would think that the two businesses were really one and artificially split solely to avoid VAT.
Basil for PM
Basil has, in his usual style, said what I was saying with a lot more detail. I think he is on the money - at the very worse, HMRC could issue a direction, but that leaves the past OK. I had a case where a business set up another business to sell second hand items to the public (non registered) with a VAT registered company, much larger, selling new items. Separate accounts, separate accountant, different bank account, recharges of rent etc from one to another. This is where it gets interesting...
As the unregistered company approached the threshold, if they had a big sale that would take them over the threshold, they sold the stock to the registered company at cost for them to sell and did Inter-company journals clearly saying it was to avoid VAT registration. Bookkeeper told HMRC this too, all before I was involved. Cue much panic!
By the time of HMRC's, we had advised they amalgamate, maybe wrongly, but that's what we did. HMRC asked a few questions, we explained about the areas they were independent, recharges etc. One year later, have not heard a thing from HMRC. Had another case similar to this too recently.
I would repeat again, these are two separate companies at companies house. That must surely make it impossible for HMRC to argue that there is in fact only one company?
Final comment
Final thought - agree with Basil, no need to disclose to HMRC. But if this is likely to keep you awake at night, you could consider stopping the arrangement now. I believe you have done enough to ensure no retrospection.
HMRC are not reasonable chaps like us though and are not trained to consider the subtle differences between arrangements and so one would think, at the very least, they would ask questions, quite a lot of them.
Well the magic question HMRC asks you is
Why have you got 2 companies....it costs you twice as much with the accountant...??
And if the answer is...because it saves the VAT....do not pass go do not collect £200
If the answer is ( Which I dont think it is) There are two separate businessess doing separate things because ....blah bah bah and its nothing to do with tax whatsoever as I have just demonstrated youa re on a stronger footng
Hmm
This plan usually works if you have a limited company (VAT registered) to serve VAT-registered customers and a sole trade (not VAT-registered) to serve the non VAT-registered customers.
Never seen it work well with two limited companies.
The two businesses need to be different enough so they don't look like you have fragmented the business to avoid VAT.
I have had numerous clients use this plan and have had no issues with HMRC ever (maybe I'm just lucky).
It also works with 2 partnerships. Mother & Son and Father & Son, per there own VAT manual.
http://www.hmrc.gov.uk/manuals/vatdsagmanual/vatdsag08350.htm
Competition for customers
Could the argument for the non-VATregd company (B) selling to domestic customers be that there would be no (or significantly lower) sales if prices (labour element anyway) had to be 20% higher due to being VAT regd? Other non-VATregd competitors would take away the customers of the company if it had to be VAT regd.
That is, company B was formed to fulfil domestic customers' orders and compete on price with other suppliers.
Price sensitivity of the market needs to considered.
well done
everyone for a balanced response.
What is needed now is some simple changes to re-inforce what Basil says (I belive he is correct). THe three tests have been mentioned and Basil has suggested some other changes.and ontop of this a different website. Havinig different trading addresses will probally be the most effective but these I think this will be difficult.