I have a client with a limited compnay providing services to clients with second homes. One part of the business involves him subcontracting laundry and cleaning services for which he invoices the clients with an added percentage for a finders/organising fee. The other part involves him carrying out small diy jobs or arranging for builders etc to do jobs and checking on the property while the owners are not there. The laundry and cleaning costs are coming in at 2.5/3 k a month and pushing his turnover close to the VAT threshold. He wants to split the 2 parts of the business into 2 separate companies as if he charges VAT he will either have to absorb it or increase his prices and lose customers. Not all clients use both parts of the business and there are some that just use the laundry business. I am conscious of the VAT avoidance issue with disaggregation and feel that I should advise my client against this. He has suggested making his wife or father in law the director of the cleaning business and using the father in law's address for the company but wants to keep the same name for both so as not to confuse existing or future clients - he doesn't want to give those using both services 2 separate invoices with 2 separate company names. I think his wife being director and using a similar name for it would be too close for HMRC's liking. I feel this is a tricky one so any advice would be most welcome as he insists he has to separate them and wants me to find a viable solution. I am wary of any repurcussions on me if I do this.
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Can he split the business in two with one part genuinely owned by his wife? The split could be customers A-J and K-Z or something equally arbitrary. Doesn't have to be on the two different business streams.
I think that might be seen as a deliberate avoidance of VAT by HMRC - he wants 2 difference companies so each would be under the threshold.
Even if genuinely separate - client wholly owns one company and Mrs client wholly owns the other?
My worry is HMRC will view him suddenly splitting the company up and handing over half to his wife just before it reaches the vat threshold as suspicious and deliberate tax avoidance
I'm sorry but it's not that tricky with these points in play:
He wants to operate both companies under the same name
He doesn't want to issue separate invoices to clients contracting with both.
It's not going to take HMRC long to decide that operating under a single name, issuing a combined invoice does not lend itself to identifying two separate businesses.
He seem to be rather of the 'have your cake and eat it' variety here.
Thank you for your response, it is appreciated. What if his father in law were to now be the sole director of the laundry business, using his own home address and a different bank account and company name do you think this would be a viable option or still look suspicious - ie why would the father in law suddenly get to have this business? I want to tell my client to forget it and swallow the VAT but I also feel that maybe a better accountant would come up with a viable solution and that I am lacking if I can't do this for him...
Case law depends on whether the taxpayer has a 'clear intention' of having genuinely separate businesses. In this case there is clearly no such genuine intention, and he merely wants to fiddle the thresholds. I can see no way this would stand up.
"he doesn't want to give those using both services 2 separate invoices with 2 separate company names. "
Here's where it all tummles down.
He either changes his mind or forgets about it.
So if he uses a different company name, has say his father in law as that company director, uses a separate invoice and bank account that would be acceptable?
Well, you'd be on the way.
It needs to be a genuinely separate business and you need enough evidence to show that to any VATman who comes calling.
One reason for splitting the business might be that the current owner can't cope with the work. Or he only did the laundry stuff because he hadn't enough trade.
You know the facts as well as anyone. Make your case from them. We can only guess.