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Trading Partnership Split & VAT Disaggregation

MTD for Vat Blues - 2 Brothers in Trade Partnership want to Split Up - Problems with Sharing Van etc

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Just been to see the two partners (they are brothers) in a reputable double-glazing installation partnership which they started 25 years ago.

It is Vat registered and makes modest profits. Turnover is around £130,000 a year.

Business is worsening, competition is more fierce, considerable time is wasted selling the product (2-4 hour stints) to potential customers who switch loyalties last minute, the two brothers are aging, and it is a "young lads" job. Young "fly by night" installers are prepared to fit the doors and windows for next to nothing just to earn a couple of hundred quid cash for a Saturday morning's work and this is undermining the trade.

To cap it all, Making Tax Digital for VAT has made them focus on the direction in which they are going.

They have decided to go their separate ways. The younger brother will carry on as a sole trader keeping the old partnership trading name. It is envisaged that turnover and profit will more than halve.

But the elder brother, who is completely fed up with the UK is planning to carry on trading in the UK for a couple of years installing double glazing and then join family abroad to work alongside them. He has also admitted to getting a little dizzy (old age) when he is hanging out of a third floor window trying to install double glazing.

Having two separate trades means than they can deregister for vat. It would appear that the economic benefit (extra cash) to them would be £7,000 per annum each with VAT deregistration.

I sat with them and warned them about HMRC Disaggregation issues. They have reassured me that it would be possible to make two entirely separate trades, but the following issues were raised by me:

1) They have always used just the one van which the elder brother is the registered keeper of. It is shown as a partnership asset in the accounts. It would appear that the van would be of greater use/benefit to the younger brother, so I assume the younger brother will buy the other half share of the van from brother at market value. They had assumed that they could just carry on owning the van jointly, but I told them I assumed this would be too provocative to HMRC re VAT.

2) Presumably, if the elder brother then wanted to use the van he would be charged a market value cost for daily hire by the younger brother.

3) Partnership tools are ancient and of little value and apparently it would be easy to divide them between the two sole traders.

4) When I mentioned having separate suppliers they balked at that idea. They must have a good deal going on with the present supplier. And in many towns there is just the one large supplier who has cornered the market in that area.

I did stress that the two sole trades must be genuinely separate trades with no overlap at all. They said this could be done, but it is the same van/same supplier which concerns me most.

Since the elder brother is the one with the sales skills/good bedside manner, he could quite easily become a double glazing sales rep with his trade contacts for a while after the partnership breakup which would stop two trades existing at the same time.

The problem I have is that I am out of my comfort zone and much HMRC VAT guidance in this area has been withheld from public scrutiny.

The partnership breakup is for personal rather than VAT issues, but it is the MTD for VAT which may have been the proverbial "straw which broke the camel's back".

What problems do readers envisage with the above. Have any readers witnessed a similar breakup which has survived HMRC VAT Disaggregation scrutiny.

 

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By Matrix
07th Mar 2019 06:55

Would they be sharing profits?

Would they both be in the van together on the same day or take turns?

Thanks (1)
to Matrix
07th Mar 2019 11:54

They would NOT be sharing profits. It is acknowledged that without the elder brother's sales skills the younger brother is going to have to rely on the goodwill/good name of the old firm's name for future business.
They would have separate bank accounts and business records etc.
The van was the sticking point although they did say that if necessary the elder brother could probably do his own work with his own car and a roof rack.
But I do think the elder brother may need use of the van occasionally for maybe larger jobs. That said, the elder brother said he is fed up of the larger, awkward jobs.
I think that the tone was they would not use the van at the same time but instead take turns.

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By Matrix
to penelope pitstop
07th Mar 2019 12:18

Is it a reliant robin?!

Thanks (4)
to Matrix
07th Mar 2019 14:58

Can't be, they made the specific assertion "no income tax, no VAT"

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to Duggimon
07th Mar 2019 17:02

They WILL be paying income tax!

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to Matrix
07th Mar 2019 17:04

.

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to Matrix
07th Mar 2019 17:04

No, a reliable Dobbin!

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07th Mar 2019 11:17

I think you're overestimating the disaggregation concerns. If the two brothers operate independently with their own separate customers then you're already most of the way there.

Would the supplier be supplying the elder brother under the name of the old partnership? That would give me some concern. Borrowing the van from his younger brother would be less of an issue I think.

Thanks (4)
to Duggimon
07th Mar 2019 11:58

Younger brother carries the business on under the old established trading name.
Elder brother would be supplied under either his own personal name or under his brand new .com website based trading name. There is no connection in the names at all.

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to Duggimon
07th Mar 2019 17:03

The elder brother would be supplied in either his own personal name or the name of his brand-new web based .com sole trade.
The younger brother would carry on with the old-fashioned traditionally named partnership name albeit as a sole trader.

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By Bobbo
07th Mar 2019 13:05

Could your concern over using the same supplier could be settled with elder brother opening a new trade account with that supplier? Which would support the assertion that there are two independent trades.

Of course the brothers would need to be careful to ensure orders aren't charged to the wrong brother's account etc.

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to Bobbo
07th Mar 2019 17:07

There will be complete separation of all accounting and supplier accounts. For all intents and purposes, it will be two separate businesses.
It is only the van sharing issue which I am worried abo

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07th Mar 2019 18:49

Your worries about the van per se seem unnecessary.

If the van sharing reflects a deeper underlying business relationship, that should be your concern. It's a bit like the double glazing equivalent of the sign over the hairdressers' door.

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07th Mar 2019 18:56

There is always a risk in such circumstances, since a VAT-registered business is split into two and the overall VAT take is reduced. It is not easy to predict how HMRC will approach it.
But you should note that, if HMRC issue a formal Notice to aggregate the activities of the two brothers, an Appeal can only succeed if HMRC have been unreasonable in issuing the Notice, which is a high bar.

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to leshoward
07th Mar 2019 23:50

That is definitely worth knowing.

I have warned the pair of them that HMRC could haul the pair of them in for questioning and ask some very probing questions.

They say that it is possible to separate everything out and form two trades. The only overlap I can see is the large van-sharing issue and the fact that they have been accustomed to working as a pair for 25 years.

What will one of them do if they have to carry an oversized window frame from their large van to the customer's house. Would they work together as a one-off ? They say not, but only time will tell.

It would appear that the elder brother is also losing his strength somewhat, so he is gravitating towards lightweight work, maybe even just the selling side, possibly for some contacts of the local double-glazing supplier.

The younger brother still has his physical strength and is not fazed at working on his own, albeit for less reward.

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By DJKL
to penelope pitstop
11th Mar 2019 10:41

Beware the insurance policy implications re the van.

Hire from A to B will likely be out unless paying a fortune for it to be permitted, named driver may work but care will be needed that this covers a different business re the other brother. Any driver (re a business policy) may work but I would want comfort it does.

I would be really cautious and ensure that all circumstances explained fully to a decent broker who , being aware of all the facts, confirmed appropriate insurance cover was in place.

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to DJKL
11th Mar 2019 10:58

Had not thought about this. Will mention to them.

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11th Mar 2019 10:20

Won't each sole trader carry the VAT/turnover history of the partnership, meaning that neither of them can immediately de-register, so MTD is still likely to remain a problem for now?

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By djn24
to Andy Reeves
11th Mar 2019 10:29

Andy Reeves wrote:

Won't each sole trader carry the VAT/turnover history of the partnership, meaning that neither of them can immediately de-register, so MTD is still likely to remain a problem for now?


Surely, they would deregister the partnership for VAT as they know that the sales will be less than the £83k in the coming 12 months, then just trade as sole traders from then onwards without any VAT worries.
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to djn24
11th Mar 2019 11:31

Thanks for that. Just had a quick look at VAT Notice 700/11 which says:

"If you’re requesting voluntary deregistration on turnover grounds, you’ll need to tell HMRC why you think your turnover is going to fall below the deregistration limit. You may, for example, have reduced your opening times, lost contracts, or changed your business practices. You should also tell HMRC what you expect your turnover will be in the following 12 months."

So I do this and then expect HMRC may invite the two brothers in for a meeting.

It's Les Howard's comments (7 March 19) above which then worry me.

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to djn24
11th Mar 2019 11:33

From HMRC website: "You can ask HM Revenue and Customs (HMRC) to cancel your registration if your VAT taxable turnover falls below the de-registration threshold of £83,000".

If turnover is currently £130k (£10833pm), and each sole trade will have half of the future turnover (£54117pm) then, assuming turnover same every month, the amalgamated turnover (all partnership, plus individual sole trade) will not fall below £83k until 9 months after the split.

The business(es) cannot de-register until the turnover is under £83k.

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to Andy Reeves
11th Mar 2019 11:47

You're wrong, as soon as you know your taxable turnover will be below £83,000 in the next twelve months then, so long as HMRC agree, you can deregister immediately.

Thanks (1)
By djn24
to Andy Reeves
11th Mar 2019 11:53

Andy Reeves wrote:

From HMRC website: "You can ask HM Revenue and Customs (HMRC) to cancel your registration if your VAT taxable turnover falls below the de-registration threshold of £83,000".

If turnover is currently £130k (£10833pm), and each sole trade will have half of the future turnover (£54117pm) then, assuming turnover same every month, the amalgamated turnover (all partnership, plus individual sole trade) will not fall below £83k until 9 months after the split.

The business(es) cannot de-register until the turnover is under £83k.

This is wrong. It's not when T/O is below £83k but when you have a valid reason to believe it will be for the coming 12 months which on the facts above will be the case.

Thanks (3)
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By JD
11th Mar 2019 15:33

Is there anything stopping Brother 1 paying for the van and hiring (at £x) to Brother 2, giving you, your financial separation.

Add to that some magnetic trade signs and this time next year they will be cushty ...

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By DJKL
to JD
11th Mar 2019 15:48

Hiring vehicles and insurance tend not to be good bedfellows, I spend a fair bit of my working life reading insurance policies (obviously did something really terrible in a previous life) and it certainly appears to be a standard exclusion- no doubt you can get cover, everything can be insured, even my legs, but at what price?

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11th Mar 2019 20:41

So, if HMRC issue a formal Notice to aggregate because HMRC feels the two businesses are linked due to the 1) financial, 2) economic and 3) organisational link then a nightmare with the VAT man will start.

1) Financial link - "Yeah guv. I paid me bruvver a tenner for borrowing his van"

2) Economic link - "Yeah guv. Borrowing me bruvver's van saved me a fortune"

3) Organisational link - "Yeah guv. I answered a business phone call for me bruv. He'd do the same for me. That's what bruvvers are for. Ain't it?"

Is it that simple for the VAT man to win?

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14th Mar 2019 20:16

The original intention of disaggregation was to prevent separation of, say, hairdressing from tanning business taking place in the same premises and sharing expenses, reception, phone, laundry etc or pub grub from drinks sales to keep below the registration limit. The dissolution of a partnership is no different from a ltd co ceasing trading and the working directors carrying on the same business individually as sole proprietors. The reason here is that one brother is feeling the effects of anno domini more than the other and intends to go abroad within the foreseeable future. The impact of MTD on this situation is to bring forward the cessation of the partnership. HMRC would have to be unusually robust to question a separation of partners with a turnover of £130k. The occasional use of the van, apart from the insurance considerations, is unlikely to be a major issue as long as there is reimbursement of costs at an arms length.

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to ruth.julian
15th Mar 2019 00:34

I like this reply. It seems to cover all of the issues raised so far.

But you reckon that "HMRC would have to be unusually robust to question a separation of partners with a turnover of £130k".

This is a little reassuring, but given HMRC unpredictability (see Les Howard's 7.3.19 comments above), there is still a slim chance HMRC could issue the formal Notice to aggregate. Once issued, Les Howard says an Appeal can only succeed if HMRC are shown to have been unreasonable.

And that is my gripe. If a Notice were issued then opens a nasty can of worms. I can only imagine the time spent arguing the point as well as the arrears of VAT and penalties etc.

My gut feeling is that unless there is an absolute separation of ALL activities then the partners should take the whole VAT issue to a VAT specialist for advice.

I just do not want to get involved in the fallout and finger-pointing over a VAT dispute.

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to penelope pitstop
15th Mar 2019 06:59

Go with your gut.

You are relying on what the brothers are telling you. Your continued reference to cans of worms perhaps indicates you don't entirely believe them.

Maybe the suggestion of seeing a specialist will test them out. (The test being how sincere they are about the matter.)

(Oh, PS, my silence on your technical analysis should not, here or elsewhere, be taken as agreement thereto. It's possible you have conflated two distinct parts of VAT law in your mind... but that doesn't change my go-with-your-gut answer, which is why this parenthesised comment is just an edit.)

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