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Is this income splitting?

Is this income splitting?


Client has approcahed me who is a sole trader selling his own services as a go-kart trainer to individuals as well as selling go-kart spares and stock to individuals and companies.

His business turnover has now reached the VAT threshold and is conscious of the effect that a 20% increase will have on his business in relation to the training income as his customers are mainly individuals.

So he has come up with the idea of splitting his business into a sole trader side which sells training and a Ltd Company which sells stock and spares.

I have mentioned to him that income splitting to avoid registering for VAT isnt allowable but I am equally unsure as to whether the 2 businesses are so distinct as to be 2 seperate entities in the manner in which they trade that income splitting wouldnt be an issue here.

Can anyone advise?



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31st Mar 2011 15:31

Business Splitting?

I think I would share your concerns. The legislation considers financial, organisational, and economic links. Although the two 'businesses' would not do the same thing, there may well be these links. This would give HMRC grounds for seeking to aggregate the businesses.

I would consider the personnel; if the practical ownership and running of the businesses were carried out be different people, then the links would not be so strong. For example, the sole trader doing the training, and a partnership selling parts. That might be an option, but HMRC may still challenge it, I'm afraid.

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31st Mar 2011 16:07

Yes, but ...

If HMRC does challenge it, they can only treat it as one aggregated business for the future, not retrospectively.  So, your client could go ahead with two separate businesses for the time being.

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31st Mar 2011 16:39

Customs can do one of two things:

1. they can issue a Notice of Direction, which aggregates the two activities into one. This cannot be back-dated. OR

2. they can assess one of the activities, on the basis that the total of the other activity should have been included. This is, of course, retrospective.

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31st Mar 2011 17:39

Look at this case: -

Robert Mullis was a sole trader making rocking horses, and owned 80% of a company (his wife owned the other 20%) that repaired rocking horses.

The VAT office claimed it was all one business - and lost: -

The judgment gives good examples of what you need to do to ensure the two businesses are separate.

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01st Apr 2011 08:40

You might want to check ......

.... whether the training is exempt for VAT purposes - which would save the hassle of two businesses.

Motor cycle training has been held to be exempt. See TK Phillips (t/a Bristol Motor Cycle Training Centre) case ref is VTD 7444.

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