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Another disaggregation question!

Jewellery shop + workshop, can they be separated?

Didn't find your answer?

(non-professional here, hope you can clarify for me).
So far the company has grown and is VAT registered. It has a retail element and a workshop carrying out repairs and manufacture for clients.
The workshop is in the basement - so shares same address and door. There are plans to convert upstairs into flats so there will be separate addresses for the upper floors.
The accountant is reluctant to separate the business into retail and workshop and I think I understand his reasoning even if they differ.
Looking ahead I see a time when the workshop will be more viable than the shop (thanks internet!).
Vat is flat rate.
Most repairs come in to the workshop via the shop, some come separately, some are carried out for other jewellers.
To simplify things it would be easier to run the two parts separately and invoice the shop for work done.
The workshop currently would not reach the VAT threshold (I suppose it could be argued this is a VAT avoidance attempt- the two parts have the same address, so I suppose it could be argued that they can not be separated.
(The company has two directors, my son (workshop) and his wife (retail shop). Life would go smoother if they each had their own company!!!)
I would welcome observations - they would help me try to explain the issues to my son as he does go blurry eyed when I approach this subject.
Thanks

Replies (16)

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ALISK
By atleastisoundknowledgable...
11th Dec 2019 17:20

Hive off the workshop into Newco, have son as director & have him resign as director on Oldco. Not sure of shareholding (you don’t say), but ideally they would follow 100% in line with directorships, but not compulsory. What you don’t want is one of the individuals to have majority shareholding of both companies. For instance, 75/25 and 25/75 would be ok. Newco = son = workshop, Oldco = wife = shop.

Newco invoices Oldco for repairs at same rate it does for 3rd parties. Oldco can add markup to customers.

Oldco should have a formal (sub?) lease to Newco for the basement.

As long as they then pay the repairs & rent charges and keep bank accounts separate, they should be fine.

Thanks (1)
Replying to atleastisoundknowledgable...:
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By RichardBailey
11th Dec 2019 18:45

Thanks for that. I had thought it would be OK, but it was the advice of the accountant that made me wonder. He probably imagines untold problems - my son is very lapse with his paperwork, wife tries to keep it all together - hence I think it would be good to divide it and stop the rows!

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Replying to RichardBailey:
ALISK
By atleastisoundknowledgable...
11th Dec 2019 18:59

Try to not have her (Oldco) do all the paperwork for him (Newco).

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Replying to RichardBailey:
RLI
By lionofludesch
12th Dec 2019 09:24

RichardBailey wrote:
He probably imagines untold problems ...

Sounds like he's very wise. If your son won't step up to the mark, that's fine, he can just pay the VAT.

One thing I picked up on - you say that the workshop will bill the shop, which is a registered business. So there's no VAT saving there, is there ? In fact, the family as a whole will be worse off because the workshop won't be able to reclaim VAT on its expenses.

You need to think out how this is going to work. If the workshop isn't going to deal directly with Joe Public, there's nothing to gain here.

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RLI
By lionofludesch
11th Dec 2019 19:02

The weakness is that the businesses share the same premises.

You'll need to take precautions to keep them separate.

Keep asking "if the other business were owned by folk I didn't know, would I be doing this ?"

If the answer's "no", you're in trouble.

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By lesley.barnes
12th Dec 2019 10:20

As Lion says you have to look at whether there any savings. Your accountant is in the best place to advise because they have first hand experience of your business. If I was your accountant I would be saying why do you want to do this what will you gain? You also have to factor in things like to time taken in admin tasks to run the two businesses separately - 2 payrolls, 2 book keeping system etc. You've also said that the workshop hasn't yet reached the VAT threshold but hinted it might in the future be more profitable than the retail part. Therefore it will have to become VAT registered. Don't forget you will be paying double accountancy fee as well for two companies.

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RLI
By lionofludesch
12th Dec 2019 10:40

The more I think about it, the more I think "Crazy idea". Flat Rate helps to an extent but I still think there are more potential problems along the way. Not least the inconvenience of maintaining these businesses as two separate entities.

How long is it likely to be before the workshop tops £85000 on its own merits ?

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Replying to lionofludesch:
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By RichardBailey
12th Dec 2019 13:41

Firsty - thank you all for your views on this.
It does look that the problems will outweigh any advantages.
What I will suggest is they keep the two parts with strict internal accounts to clarify the relationship between the two parts and to gain a sounder basis for future planning. Once the upstairs of the building becomes flats and, over the next few years, they will have to develop their internet presence and see how their High Street outlet fares, who knows, it might develop into more flats and just keeping the workshop as a physical entity.
Thanks again

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By The Dullard
12th Dec 2019 10:43

As a general rule of thumb, I find that anything that atleastisoundknowledgabe:
- thinks is a good idea, isn't, and
- think works, doesn't.

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Replying to The Dullard:
RLI
By lionofludesch
12th Dec 2019 14:08

Bit harsh, Dulls.

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Replying to lionofludesch:
ALISK
By atleastisoundknowledgable...
12th Dec 2019 21:10

lionofludesch wrote:

Bit harsh, Dulls.

A touch harsh I felt.

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Replying to The Dullard:
ALISK
By atleastisoundknowledgable...
12th Dec 2019 21:11

The Dullard wrote:

As a general rule of thumb, I find that anything that atleastisoundknowledgabe:
- thinks is a good idea, isn't, and
- think works, doesn't.

Prey tell, where did I go wrong in this case?

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By spidersong
12th Dec 2019 13:35

HMRC will ask one question: Why did you split a single VAT registered business into a non-VAT registered and a VAT registered business. Any answer that involves the word VAT anywhere will likely result in them aggregating the two businesses. Looking at your question it looks like the main reason for considering this is to save on the VAT

They will look at economic, organisational, and financial links. So if one company is dependent on the other for work and gets all its work through that, they were previously joined, they share skillsets/staff/suppliers/premises/customer base or anything like that then HMRC are likely to take the view that there's only one business even if there are prima facia two different entities.

So it's not just bank accounts and directorships they need to separate, it's almost every aspect of the business and they need to do it for a reason that's nothing to do with saving VAT.

I can certainly understand why the accountant is reluctant to try to separate this business into two parts; if you'd started out that way it might have been more of a goer but as it stands I'd foresee a potentially difficult and lengthy argument with HMRC ahead.

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Replying to spidersong:
chips_at_mattersey
By Les Howard
13th Dec 2019 09:15

I agree with this approach. Whenever a business is split and overall VAT reduced the client is vulnerable.
The question I always ask is: who is actually controlling the businesses? If the reality is that one person is in charge, then your separation will be artificial.
AND the flat rate scheme includes similar wording, so double check the Notice.

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By Allez Allez Allez
12th Dec 2019 21:03

Few years ago I had two sisters who wanted to run a hair and nail/beauty shop...one sister to do hair on the first floor, the other nail/beauty on the ground floor. From their 'business plan' they where going to split expenses etc and nevertheless they were going to extend the VAT threshold within 8 months from memory. We decided on 2 businesses, both still trade under the VAT threshold. They have two bank accounts/card machines/rates bills/set of accounts etc and if they recharge each other then it is at commercial rates...I think they even have two music licences. Anyway...HMRC raised an enquiry and we got the all clear. It's my only experience of HMRC raising an enquiry into this, I suppose perhaps the key thing is (as spidersong alludes to) what you do at the start.

On a side note, I do remember being a little worried (naturally) when HMRC's letter came through the door...but am I correct in saying they cannot dis-aggregate businesses retrospectively?

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Replying to Allez Allez Allez:
chips_at_mattersey
By Les Howard
13th Dec 2019 09:12

To answer your final question, HMRC can do one of two things:
1. Issue a formal Notice to aggregate the turnover of the two (or more) businesses, or
2. Assess one party historically on the basis that there was only ever a single business.

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