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Forming a second ltd company to avoid vat turnover threshold

Forming a second ltd company to avoid vat...

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Client is ltd company trading from premises just under vat threshold. Same client wants to expand business from second premises nearby but wants to form a second ltd company to keep both turnovers under the vat threshold. Both companies owned and managed jointly by same directors and the trade is essentially the same. My concern is that is it ok for client to avoid vat registration in these circumstances.

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Giraffe
By Luke
15th Jul 2010 20:37

No, it sounds like artificial separation of trade

which there is legislation against.

See below for a HMRC statement on it, which gives an overview.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&id=HMCE_CL_000086#P533_58214

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By WallyGandy
16th Jul 2010 08:09

AVOID?? registration

Surely your concern should be rephrased:-

... concern is NOT ok to avoid VAT Registration..... 

The answer then is in the question!

This sounds like evading VAT registration, surely

 

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By DMGbus
16th Jul 2010 13:44

If done properly OK until discovered

Whilst HMRC do have "disaggregation" powers these cannot be applied retrospectively unless they can prove that the arrangements are a sham.

So, if done properly, I see it a case of "make hay whilst the sun shines" (or pay no VAT until necessary).

I can see many thousands of pounds of VAT being legitimately saved here, I stess if done properly.

By "done properly" I mean:-

Keep proper separate recordsOne company will have one set of customers at one geographical location and the other it's own set of customers at another geographical location

If / when challenged it is NOT a foregone conclusion that HMRC's disaggregation order will be sustainable, it could be challenged provided that the neither business is financially dependent upon the other.

Some years ago I was involved in a successful challenge to the "sham" approach (back dating of VAT assessment on several businesses combined) by HMRC, interestingly HMRC said early on if they lost the "sham" arguement (which they did at tribunal) they'd then try the disaggegation tactic - which they did NOT!

So, in my view the tactic of a separate Ltd Co at a separate trading address has merit.  However, offset against this the extra costs invlolved as in a set of accounts records for each, need to keep things separate and extra annual accountancy costs (two sets of accounts to be drawn up instead of one, two sets of CT returns).  There's also a potential disadvantage with regard to loss relief if one Ltd Co makes a loss - it can't get tax relief against the profits of the other.

 

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Stepurhan
By stepurhan
16th Jul 2010 14:12

A potentially dangerous game

The fact that the two companies are owned and managed jointly leaves you especially exposed to the "sham" assertion. (Not unreasonable since the arrangements as described sound very like a sham) The premises being nearby (and thus not serving a separate area as per DMGBus's "doing it properly") is also unlikely to help any. I would also point out that losing the sham argument (should it be raised) is likely to cost much more than just the VAT saved. However, as DMGBus said, unless HMRC asset sham the VAT effect is only important going forward.

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By peterlashmar
19th Jul 2010 12:30

VAT fragmentation/ disaggregation

Setting up a new business from a new location with different limited companies is perfectly valid as a distinct business for VAT purposes BUT.

It will need to be properly recorded as being;

1- a new business with a different name and identity

2- a different location

It wil be your obligation to prove that it is not just the curent business setting up a new outlet. The new business must have its own employees and suppliers - not the existing company and its own, NEW customers.

BE VERY CAREFUL and ensure that you are proving the "arrangement" IS VALID in fact - not that you are portraying it as something that it is not.

Having different directors and shareholders, or at least their % holdings, would assist.

Is this all worthwhile? This has a doubling of accounting admin costs etc. as well as new bank account, payroll system ( but - not too many employees if turnover under £70K)

Why not look for simpler clients who are not HMRC Enquiries waiting to happen?

Finally, if you do agree to act - make sure that each of the businesses takes up HMRC Enquiry fee protection from you - do not rely on the FSB "free" cover!

Peter Lashmar

Lashmars Tax Accountants

 

 

 

 

 

 

 

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Nigel Harris
By Nigel Harris
20th Jul 2010 11:42

It works, just be careful

I broadly agree with DMGBus. This can work fine. It shouldn't be a case of VAT evasion, it should just be two different legal entities operating independently. Ownership and management don't need to be independent, but the businesses need to stand up separately in their own right. If admin is carried out by one company there needs to be a proper management charge between the companies to cover this - which is of course VATable.

There are plenty of businesses that operate different sites or outlets as separate legal entities, for perfectly good commercial reasons.

However, if you client's ONLY aim is to avoid VAT you need to consider how likley they are to start manipulating the figures once they get close to the threshold - putting invoices through the other company and shuffling sales around. That would just be fraud, time to walk away. If you think that's more than likely, I would walk now!

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By richardterhorst
20th Jul 2010 12:25

VAT is not a cost

 VAT is not a cost. It's a cash flow item.

So the only benefit maybe to a retail customer not VAT registered. However if input VAT is large then the retail customer only incurs the VAT on the margin.

Lots of work and risk for no perceivable gain.

Then look further. If the client wants to grow the business then why all this silly ducking and diving?

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Mark Lee 2017
By Mark Lee
05th Aug 2010 21:22

Following on from Richard's point

Have to assume customers are not VAT registered businesses as otherwise no benefit in keeping prices VAT free. Concerned the tax tail could be wagging the dog here.

Presumably hope is to move turnover from (say) £70,000 to (say) £140,000. How much profit is made and will the extra costs of running a second outlet with additional staff (and a second company) actually leave anything extra NET?

Need to compare the forecast NET profits of this approach to 'expansion' with:

a) increasing prices to reflect VAT when turnover demands VAT registration; and

b) making equivalent effort to increasing turnover to generate sufficient extra profit to cover for the VAT now payable to HMRC

Perhaps mark up is currently too low to allow 4/47 of prices to be paid to HMRC. Choice is to avoid breaching turnover limit, increase prices or expand by starting a different non-competing business. Would additional marketing and PR generate more turnover and profit?

Expanding by way of another nearby outlet doing much the same thing hardly seems worth it to me - even assuming client can satisfy YOU that it's not just a sham to avoid VAT registration. Unless you're satisfied you can't act without reporting him (at some stage).

Mark

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By aamirkhan
06th Oct 2015 09:13

VAT

I have a friend who is dealing in Online selling of Mobile accessories, Threshold crossed and ended up registering for VAT.

His supplier is not VAT registered business(or may be he is to keep sales down he) supplies accessories on cash basis- as its a very competitive market you have to keep such prices in order to win clients and boost sales.

Eventually he ends up paying out VAT for all the sales and unable to claim any VAT apart from minor amounts but not the major business purchases on which is paying VAT in cash form but unable to get the receipt.

Supplier says if you want to have a VAT receipt he can give one but the prices would go up.

Example-

A mobile charger cost of purchase without VAT is £5 (that is the Selling price on  cash basis) invoice, which my friend is selling for £6.50 with VAT added ( leaves him a profit of 50p) but if my friend asks the supplier for a VAT invoice which he is happy to give then price of charger inclusive of VAT will be (£5+£1=£6).

If he increases the selling price as inc-VAT purchased charger costed him £6 then my friend has to add VAT before selling as well, which is taking the selling price to (£6+£1.2=£7.2) and then and only then if he adds his previous profit of 50p the selling price reaches sky high of £7.70 inclusive of VAT.

My question is is there anyway he can reduce his VAT bill, as 90% are cash based purchases business related (mobile accessories) and sales are inc-VAT which becomes costs for my friends business here in this case.

Looking forward to your kind advice.

Thanks

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