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Operating two companies for VAT

Client wants to separate revenue streams into VAT and Non VAT streams.

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A client owns a small gym. Currently, T/O is made up of product sales (supplements, clothing etc) and monthly subscriptions. T/O is currently below the VAT registrations threshold.

The client is moving to larger premises where he hopes to get increased numbers of clients. Combined income will take him over the VAT threshold at the new location. He has no scope for increasing subscription prices to include VAT so he will take a 20% hit on his income. Usual story.

As you can imagine he has asked can he set up two limited companies – one VAT registered to reclaim the rent VAT and do the product sales where there is less sensitivity to price increases; and the other not VAT registered for the subscriptions. The VAT registered business would be a subsidiary of the non-VAT registered business.

My advice has been that this is unlikely to succeed as up until now it has been run as one business and HMRC are likely to view it as the same business going forward despite the two limited co.'s having two different revenue streams. Therefore, it is not worthwhile doing this.

Is this the correct advice and the is no potential for the client to claim for improper advice?

Replies (4)

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By Les Howard
22nd May 2018 14:11

I agree. The two businesses are closely related, and to separate them would be artificial given the common ownership.
Can he seek advice on making the gym VAT exempt? Is he personally teaching sports?

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By carnmores
23rd May 2018 08:05

You may want to purchase Claritax's book on VAT registration

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By atleastisoundknowledgable...
23rd May 2018 09:30

I would say “artificial separation”, so no-can-do.

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By Bobbo
23rd May 2018 13:40

Based on the information provided, inclined to agree with other posters on artificial separation.

If you were able to justify a separation, surely the subscriptions [to access the gym] should be income to the company which rents the gym?

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