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How to Mitigate Possible VAT Re-aggregation?

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I have two Limited Companies run by the same family. The first does home improvements, the second (formed just over a year ago) does building. Both trade below the VAT limit.

I would like to mitigate any possible claim of VAT re-aggregation. As the first Company has a full time employee (not related in any way to the family) it occurs to me that making him a minority shareholder would alter the ownership of that Company and thereby achieve the objective.

Does that seem reasonable?        

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By Accountant A
19th Oct 2019 12:23

You refer to "re-aggregation". What happened at the disaggregation?

EDIT And can you point to the legislation that you are relying on when you says "making him a minority shareholder would alter the ownership of that Company and thereby achieve the objective".

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By whiteways
19th Oct 2019 13:27

What happened was that he formed a separate Company to do building work. I apologise if I used the wrong term.

What I have looked at is FA1997 s31 para 1A which seems to involve a large element of interpretation. However, it seems to me that a Company with three shareholders is clearly a different financial entity than one with two.

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Replying to whiteways:
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By Accountant A
19th Oct 2019 14:26

whiteways wrote:

However, it seems to me that a Company with three shareholders is clearly a different financial entity than one with two.

What the legislation says is "... the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links". I don't think that giving an employee a (presumably small) minority shareholding would be sufficient to fall within than exception.

What about the other factors that HMRC give in this SP:

https://www.gov.uk/government/publications/statement-of-practice-4-1983/... ?

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By whiteways
19th Oct 2019 14:59

I appreciate your input.

The employee's shareholding would actually be 20 0r 33 percent, which is not insignificant.

Interesting you should cite SOP4 because I also looked at this, and in particular the following statement:

"The basis of the Tribunal’s decision will continue to be whether HMRC could reasonably have been satisfied that there were grounds for treating all the separated parts as a single taxable person, given the legal criteria and the purpose of the legislation."

I do not think a Company with three shareholders could be considered the same legal person as one with two.

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By Accountant A
19th Oct 2019 15:27

whiteways wrote:

I do not think a Company with three shareholders could be considered the same legal person as one with two.

I don't read that in what the SP says. Would not the "parties involved [be] closely bound" if one is wholly owned and the other majority owned? You may be right, however; it's not an area of my expertise.

Anyway, what about Para 6 "The meaning of financial, economic and organisational links". How do the arrangements of the two companies look against those considerations?

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chips_at_mattersey
By Les Howard
19th Oct 2019 21:33

As above.
The question is not the number of shareholders, but whether HMRC’s decision to aggregate is reasonable. In my view it is.

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Replying to leshoward:
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By whiteways
19th Oct 2019 22:09

leshoward wrote:

As above.
The question is not the number of shareholders, but whether HMRC’s decision to aggregate is reasonable. In my view it is.

I appreciate your view. However, I don't see how the scenario I have outlined meets the definition of "a single taxable person".

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Replying to whiteways:
chips_at_mattersey
By Les Howard
20th Oct 2019 21:42

The legislation allows HMRC to treat the multiple legal entities as a single taxable person. They consider the financial & economic & organisational links as part of their process.
Only if their decision is found to be unreasonable will any appeal be allowed.

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Replying to leshoward:
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By whiteways
20th Oct 2019 22:07

leshoward wrote:

The legislation allows HMRC to treat the multiple legal entities as a single taxable person. They consider the financial & economic & organisational links as part of their process.
Only if their decision is found to be unreasonable will any appeal be allowed.

What about legal entities that have different ownership?

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Replying to whiteways:
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By spidersong
21st Oct 2019 09:17

The whole point of the disaggregation rules is that HMRC can bring together different legal entities with different ownership - different ownership is not the be all and end all of disaggregation.

The test, as Les says, is whether two entities are financially, economically and organisationally bound so as to in effect be one. So if I 'owned' part of this company and don't even know these people, then it could still be aggregated if one entity controls everything, does the marketing, sorts the suppliers, answers the phones etc. etc.

If you had Bob and Henry, who are both window cleaners with their own companies, then if Bob places all the ads, sorts out the van hire, raises the invoices in two different names, talks to the clients of both companies, lends Henry his spare bucket regularly, has organised the insurance of both vans etc. etc. then HMRC will (reasonably) take the view that there is one business controlled by Bob, even if Henry has 100% shareholding in H's Window Cleaners Ltd.

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Replying to spidersong:
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By whiteways
21st Oct 2019 10:41

spidersong wrote:

The whole point of the disaggregation rules is that HMRC can bring together different legal entities with different ownership - different ownership is not the be all and end all of disaggregation.

The test, as Les says, is whether two entities are financially, economically and organisationally bound so as to in effect be one. So if I 'owned' part of this company and don't even know these people, then it could still be aggregated if one entity controls everything, does the marketing, sorts the suppliers, answers the phones etc. etc.

If you had Bob and Henry, who are both window cleaners with their own companies, then if Bob places all the ads, sorts out the van hire, raises the invoices in two different names, talks to the clients of both companies, lends Henry his spare bucket regularly, has organised the insurance of both vans etc. etc. then HMRC will (reasonably) take the view that there is one business controlled by Bob, even if Henry has 100% shareholding in H's Window Cleaners Ltd.

I understand what you’re saying, but I can’t see how this squares with what HMRC calls “a single taxable person”. We were always taught that VAT is levied on the person, not the business. With the best will in the world I find it difficult to see how two companies with different shareholders could be viewed as the same legal person. If the issue is one of control, then surely a company is controlled by its shareholders?

I don’t know of a legal decision where two companies in this situation were aggregated in this way.

I don’t have any empirical evidence to support this, but it also occurs to me that there are probably thousands of existing Companies that have director(s) or shareholder(s) in common. Do they all face possible aggregation?

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Replying to whiteways:
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By Tax Dragon
21st Oct 2019 11:33

Aggregation necessarily treats two as if they were one.

VATDSAG05150 seems a fairly straightforward read.

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Replying to whiteways:
Stepurhan
By stepurhan
21st Oct 2019 13:37

whiteways wrote:
If the issue is one of control, then surely a company is controlled by its shareholders?

Have you filled in a Confirmation Statement recently? Did it just ask for a list of shareholders, or did it ask for a list of people who have control that might not just be shareholders?

Did you genuinely want an answer to your question, or are you just wanting people to agree with you? Because you seem determined to just repeat yourself without actually addressing the potential problem several people have raised now.

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Replying to whiteways:
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By spidersong
21st Oct 2019 15:53

[quote=whitewaysI don’t have any empirical evidence to support this, but it also occurs to me that there are probably thousands of existing Companies that have director(s) or shareholder(s) in common. Do they all face possible aggregation?

[/quote]
Yes - If they have significant organisational, financial and economic links. That is what disaggregation is about.
And most disaggregation cases revolve around 2 different legal entities like Surreal Hair MAN/1998/0554 VTD17215 which had a sole prop and a partner who were aggregated as a single entity, or P & V Leonidas LON/1997/1594 which had two different 'sole traders' (who weren't in the end).

If all you needed to do was get two or more entities running then every business would just involve three or more shareholders A, B, and C A66%/B33% in one, B66%/C33% in the second and the third C66%/A33%, hey presto 3x the registration limit despite the fact they all operate out of the same premises, share a bank account, use the same staff, the same suppliers, and call themselves Bob's Burgers Ltd, Burgers by Bob Ltd and Roberts Restaurant Ltd. Do you really think HMRC would fall for that just because there are 3 companies with different controlling interests registered at companies house? I think they would say that two of them are a sham and register just one for VAT, based on the fact that there are significant organisational, financial, and economic links between the three 'entities'.

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By Accountant A
21st Oct 2019 11:13

Three of us have now asked about the financial/economic and organisational links which the SP refers to. If you care to share some detail about that, you might get a better informed view. You seem to be obsessing about the ownership which, as has been pointed out, is not the key factor.

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Replying to Accountant A:
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By The Dullard
21st Oct 2019 13:51

Whatever your contrary view, the OP doesn't agree with you, so kindly change your view to one the OP can agree with or stop aruing with the OP.

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By whiteways
21st Oct 2019 19:38

I can’t answer in detail about the financial, economic and organisational links of the new company because, as I explained before, it’s a new company and I haven’t seen the books yet.

I do think the HMRC guidance is open to interpretation, and I don’t believe the points I have raised have been fully addressed. However, I am concerned that the tone of responses has become increasingly combative. I don’t know why - I thought we were all meant to be on the same side.

Nevertheless, for this reason, I will no longer be responding on this thread. I will have to try and advise my client as best I can.

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