My wife has a salon, which is run from leased premises, and offers hairdressing services, as well as retail products.
We are exploring the possibility of forming a second company to separate the retail side of the business from the services side. I understand there are implications regarding artificial separation of a company in order to minimise turnover, and effectively avoid paying any VAT. Would the same implications apply if both companies were registered for VAT?
For example, could the services side of the business be registered under the flat rate scheme (13%), and have the retail side registered at the standard 20% rate. That way, all the products purchased, as well as the rent etc would be recoverable at the 20% rate, whereas VAT for the services would be covered under the flat rate.
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Replies (11)
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Surely you would be asking your Accountant?
That way your wife gets advice based in her personal circumstances.
That way she can ask ask for herself!
https://www.icaew.com/about-icaew/find-a-chartered-accountant
Other professional bodies are available.
"Would the same implications apply if both companies were registered for VAT?"
Yes - in that the same determination of whether they are connected companies applies.
And a single/connected entity cannot operate two different VAT schemes concurrently (and certainly not conveniently put all the purchases through as Inputs whilst applying the reduced rate to Outputs).
Whatever I often say on here about them, HMRC are not entirely witless.
A proper VAT expert may come along later to give you chapter and verse but, in the words of HMRC's official guidance on the subject of the flat-rate scheme ...
"Talk to an accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you."
Even if you can do it, would you want to ?
The service arm might well become a limited costs business at 16½% flat rate.
Think of a clever wheeze and there's a fair chance HMRC will have thought of it first, drawing on their fifty years experience.
Doing your own tax planning based on anonymous internet forum comments is about as sensible as having a go at cutting your own hair based on something you’ve read. Think of it that way.
Para 3.8 of Notice 733 is the relevant section: www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-notice-733...
... and, after reading that, revert to OP's question:
".. forming a second company to separate the retail side of the business from the services side .. (are there) implications regarding artificial separation of a company"
Hence my previous response that, Yes (there are implications).
A professional adviser will be able to tell whether (or not) there is any way to achieve the desired outcome without triggering a 'connected companies' scenario.
If it looks too good to be true, it usually is.
Are the compliance costs of two companies, and all that is required to keep them separate, (bank accounts, invoicing, management) etc more than the perceived VAT benefit? Let alone the penalties if you do get this wrong.
I'm guessing yes.
In all my years of reading Aweb, I am forever reading about groups of companies etc, shareholder splits, whatever, where the whole "group" ony has a turnover in the hundreds of thousands.
In my professional life, I have worked with single companies up to £30m that haven't felt the need for any kind of splits or groups.
Just sayin'
If it looks too good to be true, it usually is.
Are the compliance costs of two companies, and all that is required to keep them separate, (bank accounts, invoicing, management) etc more than the perceived VAT benefit? Let alone the penalties if you do get this wrong.
I'm guessing yes.
In all my years of reading Aweb, I am forever reading about groups of companies etc, shareholder splits, whatever, where the whole "group" ony has a turnover in the hundreds of thousands.
In my professional life, I have worked with single companies up to £30m that haven't felt the need for any kind of splits or groups.
Just sayin'
It seems to be the flavour of the month/year(s) with some advisors. There is one local to me who by default sets up a Holding Co, Trading Co, Property Co and Investment Co regardless of size!
As Hugo and Les has pointed out, HMRC have already thought of the scenario where you split the business and load all the overheads into the normal VAT registered businesses/full recovery and strip the flat rate entity down to just the service element.
As Lion has pointed out, salon would have no eligible costs going through it and would likely be a limited cost trade which removes any benefit of using the flat rate scheme, plus the added cost of now having two companies with two sets of accounts and compliance to deal with. Is it really worth the effort and risk for a nominal gain?
As other learned contributors have said, this may be a good idea but the business should be of some scale to be able to absorb all the costs and pain. Surely one for your accountant or adviser.
