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Business Separation rules for VAT

Business Separation rules for VAT

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Has anyone had experience of C&E interpretation of their business separation rules?

I have a client with a limited company that sells winter holidays which, for VAT purposes, falls within the Tour Operators Margin Scheme. The business is currently well below the VAT threshold.

He is now setting up a new business to sell summer holidays. It is likely that this will be set up as a new limited company with the same Directors and shareholders, trading from the same premises (their home). In all other respects the businesses will be run separately. My client wants to keep the two businesses separate in case the new venture is not a success.

Please can anyone advise from their own experience with C&E if they will view this arrangement as a single business for VAT turnover purposes?

Would it make any difference if the second business had a different type of activity, e.g. selling widgets?

Philip Rushton

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By davidgough
15th Mar 2004 15:33

How have you calculated the Vatable turnover?
NB if the client is within TOMS it is the profit margin which is used to determine whether or not the client should be vat registered.

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By puzzel
09th Mar 2004 23:44

Referenced just like the tax system
Having recently come accross this problem. I HAVE a client that runs a haulage business as a sole trader and they are intending to expand in several areas (actualy three new businesses). They intend to transfer the haulage business into a Ltd Co, create a new Ltd Co for property investment and at the same time create a business partnership in running a local shop.
No connection in similar tade's is true (with the exception of the haulage business becoming a Ltd Co), but things are is little different when it comes to VAT registration.
A Co is an individual entity (sorry for teaching you to suck eggs)and will be allocated a unique VAT registration number. An individual, partnership or part there of will be allocated ONE VAT REGISTRATION NUMBER (just as the same principle of completing tax returns, even though they are not a conecting trade).
If an individual, partnership or part there of, that is already registered for VAT purposes. Commences a new trade that is intended or subject to VAT registration the same VAT No is used, as the VAT No is allocated to the individual, partnership or part there of (get my drift).
A Co is an individual entity (sucking eggs again) and therfore not a person.
A connecting trade can be defined where the husband runs a fish & chip shop and the wife runs a cafe' in the adjoining building. If a customer in the cafe' requires a commodity that the husband provides and is not provided by the wife, i.e. passes the fish and chips to the recipient via a serving hatch or back door. this can be defined as a connecting trade and thus both are subject to VAT regulations. (dislexic keyboard, just got ack from the pub, sorry for the spelling)

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By theaardvark
09th Mar 2004 14:33

Difficult to tell....
HM C&E consider each case on its merits. I would have thought that this was very close to the knuckle and could quite easily fall foul of the disaggregation rules.

Provided your client has done everything to ensure that legally there are 2 separate businesses, separate bank accounts, different or recharged staff, etc..., then HM C&E can only apply a business splitting direction to treat the 2 companies as one from a current date.

Action can only be retrospective if C&E can prove that, in fact, there only ever was one business.


Paul Taylor

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By John Savage
09th Mar 2004 19:53

Business fragmentation
I have a similar case in connection with one of my clients, whose wife runs a genuine seperate business.
My advice is to keep seperate books, bank accounts, annual accounts, tax registrations etc etc. If employing staff, keep them on seperate payrolls
In addition, draw up a written agreement from the main business (I assume that run by the original company) to the new company, setting out clearly the trading relationship between the two (or lack of any direct relationship) and covering things such as rent for sharing of premises, charges for shared facilities such as phones, electric, water, rates and such like. Some of these charges are assumed will be exempt, and some taxable. Then the new company pay each month/week or whatever is agreed such monies as per the terms of the agreement. Then keep the agreement safe, and produce it if challenged. I'm not suggesting here that you seek out a lawyer to do this, just one in plain simple clear terms drawn up by the directors. Then stick to it, as the working relationship must be seen to be what is on the agreement. If C&E can demonstrate that the reason why the two are being kept seperate is to avoid VAT registration, your case is weak. On the other hand, if there are genuine commercial reasons, your case is stronger.

Partly because the two companies deal with similar services, there can, unfortunately, be no guarantee that C&E won't try to challenge it, but a written agreement does make your case stronger, and if put in place at the beginning, is more difficult to successfully challenge than if it is put in place when and if they mount a challenge.

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By rushtonp
16th Mar 2004 08:16

How have I been calculating VAT turnover.
Thanks David. I have been using the profit margin to calculate turnover after some great help from a TOMS expert at Bedford VAT Office.

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