Hi all, thanks for taking the time to read my question.
I own three separate Limited Companies operating as independent franchised outlets in different regions of the UK. They are identical in terms of their brand identity, product offer etc.
- Each has their own business bank account
- Each has their own premises which are held on leaseholds under each separate Ltd Company
- Each has their own manager, team and runs their own payroll
- Each is owned by the same franchisee who is the sole director with 100% shareholding in each
- The franchisee is independent of the franchisor
- Companies are independently registered for VAT
- Two are on 20% VAT as turnover is in excess of £230k, one remains on the Flat Rate Scheme (turnover now approx £150k)
- Companies file separate accounts
- Companies founded at staggered times across a 5 year period as the franchisee purchased new terrirory rights / franchise agreements for new areas.
- Companies have been trading for between 5-10 years
- Director intends to sell off the companies individually as part of a staged retirement in the future.
- Two of the companies had a second Director when founded who has now resigned leaving the current director as the sole shareholder.
- The third company was founded by the current director.
Given that associated businesses cannot join the flat-rate scheme, I just want to check that the remaining business on the flat-rate scheme has the right to be on it.
- None of the three Ltds are under the main influence of the other
- There are no financial links between the Companies and no financial support has been given by one party to the other (e.g. no loans etc)
- Economic links are minimal/absent (one pays a small consultancy fee for HR advice that all benefit from)
- Organisational links are limited to the Director, and one area manager, who are on the payroll of one of the companies but all companies have the benefit of their employment.
Related resources
Replies (26)
Please login or register to join the discussion.
Not my area of expertise, but I'm wondering if these three companies all 100% owned by you are 'eligible to join a VAT group' by virtue of that common control and thus your third company is excepted from the flat rate scheme because of aforementioned eligibility to join a VAT group.
You say "Organisational links are limited to the Director, and one area manager, who are on the payroll of one of the companies but all companies have the benefit of their employment."
I would say an area manager is quite a strong organisational link as demonstrably one person is responsible for coordinating the activities of all three businesses. In addition there is the shared HR consultancy (dare I ask if this consultancy is aware they're actually advising three, supposedly, separate, companies rather than just the one their invoice is to?) which you admit all benefit from. You sure there's nothing else that's pooled?
Also, what is this meant to mean? "Two of the companies had a second Director when founded who has now resigned leaving the current director as the sole shareholder."
Being a director is separate from being a shareholder, i.e. their resigning as a director would not necessarily have any impact on shareholdings.
Bobbo
"Not my area of expertise, but I'm wondering if these three companies all 100% owned by you are 'eligible to join a VAT group' by virtue of that common control and thus your third company is excepted from the flat rate scheme because of aforementioned eligibility to join a VAT group."
Why are you saying eligibility to join a vat group matters IF there is no vat group.
Notice 733 clealrly states the following.
If you’re part of a VAT group, or are eligible to join an existing VAT group, then you cannot use the Flat Rate Scheme. If you become eligible to join an existing VAT group after you join the scheme, then you must leave the scheme with effect from the date you become eligible.
I read this as clearly saying you need to be part of a vat group OR eligible to join an EXISTING vat group. Csan you advise if you have misread 733 or does it say different somewhere else - would not make sense for 733 to reference "existing vat group" if they didnt mean what they said ?
Hi - thanks for replying.
HR consultancy contract is a group contract for the three companies.
The area manager is essentially responsible for standards and compliance. The day-to-day running of the stores is done by the Store Manager in each business.
Other than these - there is nothing else that is pooled.
The comment of the resignation is because initially two of the three locations were founded with another franchisee as a second director on equal shares, who has since resigned, and so the business now has one director with 100% shareholding.
Am I correct in my interpretation that all three, financial, organisational and economic ties must be present to qualify an association? And so, in the absence of financial links/loans the companies are not associated. In reading the literature I often read 'could the one, function without the other' - as a test of association. They do, and can. There is also precedent for franchised locations being sold on, and so there is a genuine logic to them having been set up in this way.
"Am I correct in my interpretation that all three, financial, organisational and economic ties must be present to qualify an association?"
where did you get that impression from ?
Welshback Exercise
It's worth a quick read of the leading case of Welshback Exercise on this. You can limit yourself to paragraphs 43 and 44 if you want to, but the background's always nice.
Either the business of one person needs to be under the dominant influence of the other person, which isn't the case, or the two need to be closely bound by financial, economic and organisational links.
All three need to be present. Whilst the two companies have common organisational links, nothing you say suggests that there are any financial links at all. The current sharing of office and storage facilities would be an economic link though if no market rent is paid.
Your third paragraph would rather suggest that the two businesses aren't closely bound by their links at all, however.
The purpose of the test, of course, is to prevent business splitting in order to stay within the scheme, so the current combined turnover also works in your favour.
Another decision worth a quick read is RDF Management Services. HMRC's analysis is at paragraph 32 and the tribunal largely supports their analysis with its own at paragraph 48.
If there were a market rent paid for the office and the storage (which may cause a VAT cost), I'd say the two aren't associated. They may well not be without such a market rent.
"Am I correct in my interpretation that all three, financial, organisational and economic ties must be present to qualify an association?"
where did you get that impression from ?
Probably the vagueness of the quote in my post below.
I arrived at this interpretation from the wording, the use of 'and' as opposed to 'or', and in reading other posts on this topic, where it was mentioned that all three had to be present. I believe the Welshback case also confirms this, but correct me if I am wrong
Regulation 55A(2) provides
For the purposes of this Part of the regulations (our italics), a person is associated with another person at any time if that other person makes supplies in the course or furtherance of a business carried on by him, and
(a) the business of one is under the dominant influence of the other, or
(b) the persons are closely bound to one another by financial, economic and organisational links.
"Associated’ businesses cannot join the Flat Rate Scheme.
"If you’re unsure whether the particular relationship between your business and another forms an ‘association’ then contact the VAT helpline.
"You’re associated with another business if:
"one business is under the main influence of another
2 businesses are closely bound by financial, economic and organisational links or another company has the right to give directions to you
in practice your company repeatedly complies with the directions of another — the test here is a test of the commercial reality rather than of the legal form
"If your business has been associated in this way with another in the last 2 years, but is not associated at the time you apply, HMRC can let you use the scheme if they agree in writing that your former association is not a risk to the revenue."
All a bit vague, but common control, surprisingly, isn't something that's mentioned here. So it looks like they're not associated. I might confirm that with HMRC, though, as it's not unknown for them to resile from their own advice.
https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs6200
"Regulation 55A(2) of VAT Regulations 1995 excludes any business that is associated with another person, whether or not that person is a corporate body or a natural person and irrespective of the taxable status of the person.
The regulation defines association as any case where:
the business of one is under the dominant influence of the other OR*
the persons are closely bound to one another by financial, economic and organisational links."
*note the use and importance of "OR" in the above statement
The OP states that "None of the three Ltds are under the main influence of the other" but starts their post with "I own three separate Limited Companies" and concludes with "the sole Director intends to sell off each of the entities as part of a staged retirement plan"......so does this not prove the sole Director has control and influence over all three entities?
HMRC Notice 733 https://www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-no... states at section 3.7 :-
"3.7 If you’re part of a VAT group - or are eligible to join an existing VAT group - then you cannot use the Flat Rate Scheme....VAT groups are for incorporated businesses which are linked to other incorporated businesses by common control or ownership."
The conditions for joining a VAT group are that there is a common controller who has ultimate decision making powers for all of the entities within a VAT group, the OP appears to meet the definition of forming a VAT group (if they wanted to) and so does not section 3.7 come into play?
I would suggest this is a query to take to your Accountant and get some advice on this, also consider this case below. Nobody here, including me, on this forum can give you a definitive answer to your question as it'll come down to the precise detail of everything.
http://www.bailii.org/uk/cases/UKVAT/2007/V20310.html and specifically sections 42 and 43 although read the whole case for context.
If it transpires the 3rd company shouldn't have been on the flat rate from day one, then there will need to be a disclosure to HMRC, again something worth speaking to your Accountant about to handle mitigation/penalties, etc.
Thanks for replying
I understand 'the business of one is under the dominant influence of the other', to refer to one limited company influincing the other, not therefore refering to the Director/shared ownership.
Regarding 3.7 - If you’re part of a VAT group - or are eligible to join an existing VAT group - then you cannot use the Flat Rate Scheme
None of the companies are part of a VAT group, and have never been part of a VAT group. Nor are they eligible to join an existing VAT group because there is no existing VAT group.
Again, correct me if I am wrong in my interpretation.
‘Control’ for this purpose has a special meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006. This definition of VAT group eligibility has been in force since 1999.
1159Meaning of “subsidiary” etc
(1)A company is a “subsidiary” of another company, its “holding company”, if that other company—
(a)holds a majority of the voting rights in it, or
(b)is a member of it and has the right to appoint or remove a majority of its board of directors, or
(c)is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(2)A company is a “wholly-owned subsidiary” of another company if it has no members except that other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries.
(3)Schedule 6 contains provisions explaining expressions used in this section and otherwise supplementing this section.
(4)In this section and that Schedule “company” includes any body corporate.
‘Control’ for this purpose has a special meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006. This definition of VAT group eligibility has been in force since 1999.
1159Meaning of “subsidiary” etc
(1)A company is a “subsidiary” of another company, its “holding company”, if that other company—
(a)holds a majority of the voting rights in it, or
(b)is a member of it and has the right to appoint or remove a majority of its board of directors, or
(c)is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(2)A company is a “wholly-owned subsidiary” of another company if it has no members except that other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries.
(3)Schedule 6 contains provisions explaining expressions used in this section and otherwise supplementing this section.
(4)In this section and that Schedule “company” includes any body corporate.
Baffled why you bothered to ask us.
Baffled why you bothered to ask us.
To me its clear the guidance in 733 is far from clear - to me a very fair question being posed here.
Baffled why you bothered to ask us.
To me its clear the guidance in 733 is far from clear - to me a very fair question being posed here.
I partly agree that the OP's question is valid, the Notice 733 is a little confusing but depends if you are reading it from a neutral position of trying to learn the rules or from a position where you are trying to arrive at a specific outcome (which is where I think the OP is coming from).
Personally, the guidance is clear enough and I've posted my reply and the OP has dismissed it with replies that indicate they've not understood the point I was trying to get across, maybe I didn't explain it well enough.
If the conditions for a VAT group are met, then flat rate can't be used, the OP replied with a post about Companies Act and subsidiary/holding companies. The VAT group conditions are defined here https://www.gov.uk/hmrc-internal-manuals/vat-groups/vgroups02190
The "Association" rules of organisational, financial and economic links is an anti avoidance measure to prevent abuse of the flat rate scheme.
https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs6100
"The FRS is intended for small stand-alone businesses and the anti-avoidance exclusions mean businesses that are eligible for group treatment....are excluded."
https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs6200
"The regulation defines association as any case where the business of one is under the dominant influence* of the other ....or...the persons are closely bound to one another by financial, economic and organisational links."
*Dominant "influence" (not dominant control).
The "association" rules re. organisational/financial links, remember we are coming from a position that these rules are an anti avoidance measure, they are designed for HMRC to capture businesses who structure themselves to gain a tax advantage of using the FRS by breaking up their trade into smaller companies.
So we have to interpret this part of the law quite strictly and you can't say "Economic links are minimal/absent (one pays a small consultancy fee for HR advice that all benefit from)" as that simply confirms there is an economic link there and "Organisational links are limited to the Director, and one area manager" ticks another box and as for financial links, where did the start up capital come from for each entity?
OP should be speaking with their Accountant is probably the best course of action here, an Accountant can look at things from a neutral and objective perspective.
Thanks for reverting back again Jason. Apologies if it appears I have dismissed your posts. Not my intention.
I do disagree on your interpretation though in terms of the definition of association in 55A(2)
(2) For the purposes of this Part, a person is associated with another person at any time if that other person makes supplies in the course or furtherance of a business carried on by him, and—
(a)the business of one is under the dominant influence of the other, or
(b)the persons are closely bound to one another by financial, economic and organisational links.
Again - one business is not making supplies for the other. One business is not under dominant influence of the other, as the three operate independently *of each other* which is key here. One company does not give instructions to the other, rather I as the owner direct the operations of each business, which at most constitutes an organisational link being shared ownership.
As for the VAT group issue - I think we have established that this does not apply because there is no *existing* VAT group to join, and the businesses have never been part of a VAT group.
Start up capital was provided in the form of a Director loan from my personal funds each time, all of which have since been repaid.
My accountant has confirmed in the past that we do not meet the criteria for association, and other franchisees who operate in the same structure have confirmed the same with their respective accountants. The accountant has run this by HMRC in the past and they were satisfied. I know this is confusing then as to why I am questioning this - but this is in my nature. I am quite an anxious checker and re-checker, and I also want to understand the tax landscape of my own business.
"As for the VAT group issue - I think we have established that this does not apply because there is no *existing* VAT group to join, and the businesses have never been part of a VAT group."
I would say its clear as mud FRS6100 doesnt include the "existing" text that notice 733 does - so imho there is the element of doubt here - i cant see anything in s55a text that clarifies that issue either way
per frs6100
FRS6100 - Anti-Avoidance Rules: What are the anti-avoidance exclusions?
The FRS is intended for small stand-alone businesses and the anti-avoidance exclusions mean:
Businesses that are eligible for group treatment, or are registered for VAT as a divisional registration, at the time of application - or have been in the preceding 24 months - are excluded.
Again - one business is not making supplies for the other. One business is not under dominant influence of the other, as the three operate independently *of each other* which is key here. One company does not give instructions to the other, rather I as the owner direct the operations of each business, which at most constitutes an organisational link being shared ownership.
You omit the 'area manager' employed by one company with responsibility for all three. Because of this you surely cannot say the three operate independently of each other as any time the area manager does anything to do with the other two companies that is them not operating independently of one another.
Thanks for reverting back again Jason. Apologies if it appears I have dismissed your posts. Not my intention.
I do disagree on your interpretation though in terms of the definition of association in 55A(2)
(2) For the purposes of this Part, a person is associated with another person at any time if that other person makes supplies in the course or furtherance of a business carried on by him, and—
(a)the business of one is under the dominant influence of the other, or
(b)the persons are closely bound to one another by financial, economic and organisational links.Again - one business is not making supplies for the other. One business is not under dominant influence of the other, as the three operate independently *of each other* which is key here. One company does not give instructions to the other, rather I as the owner direct the operations of each business, which at most constitutes an organisational link being shared ownership.
As for the VAT group issue - I think we have established that this does not apply because there is no *existing* VAT group to join, and the businesses have never been part of a VAT group.
Start up capital was provided in the form of a Director loan from my personal funds each time, all of which have since been repaid.
My accountant has confirmed in the past that we do not meet the criteria for association, and other franchisees who operate in the same structure have confirmed the same with their respective accountants. The accountant has run this by HMRC in the past and they were satisfied. I know this is confusing then as to why I am questioning this - but this is in my nature. I am quite an anxious checker and re-checker, and I also want to understand the tax landscape of my own business.
No decent Accountant has "run this past HMRC", you either obtain a written answer to your enquiry or you do not. If its not in writing, then you are grasping air, if it is in writing then there is nothing to worry about unless the facts given to HMRC were not correct or were correct but since changed.
I think I'm done on this thread, if the OP wants to interpret the law one way then there's nothing much I can do to convince them otherwise.
Hi Jason
The accountant has obtained a written letter from HMRC.
I'm sorry I've annoyed you. I am just trying to learn, and so asking questions.
Thanks anyway for your input - I did find it useful and interesting
Hi Jason
The accountant has obtained a written letter from HMRC.
I'm sorry I've annoyed you. I am just trying to learn, and so asking questions.
Thanks anyway for your input - I did find it useful and interesting
No worries hctab, not annoyed, more a case of you say toe-may-toe and I say toe-mar-toe , two opposing views which only a Tribunal and lawyers could get to the bottom of in terms of what the meaning of a word is, we'll just end up going around in circles.
If you've a written confirmation from HMRC, then as long as the facts were correct then that should give you some comfort. If you think that letter is possibly on shaky ground, then ask your Accountant to get a refreshed opinion, although that does come with the risk that if you get a different answer than before, it opens up a can of worms.
"Personally, the guidance is clear enough"
imho clearly its not clear 733 clearly uses the text "existing" - if frs6100 says otherwise whats to say frs6100 is more right than 733.
Its one thing missing something by absence but when one uses specific text such as "existing" that 733 uses then really 733 couldnt really be clearer in what it says - whether 733 is right (and frs6100 wrong ?) or not i dont know.
per 733
3.7 Using the scheme in a VAT group
If you’re part of a VAT group, or are eligible to join an existing VAT group,
Overall clear as mud as is often the case with 733 - even when it says something we doubt if that is truthful !!
Baffled why you bothered to ask us.
To me its clear the guidance in 733 is far from clear - to me a very fair question being posed here.
Agreed - but the OP knows more than us, apparently.