vat splitting of the business?

a limited company owner (construction) vat-registered wants to set up another company to do maintena

Didn't find your answer?

A limited company owner (construction) vat-registered wants to set up (and own/control) another company to do property maintenance (this company is not registred for vat until reached threshold). will that amount to VAT-antiavoidance? the two companies may have common clients (first company construction and then maintenance by the second company) and may be using common equipment and sharing premises/services.

thanks.

Replies (5)

Please login or register to join the discussion.

avatar
By Wanderer
10th May 2021 12:47

The purpose of this guidance is to help you to determine: whether two (or more) apparently separate businesses are, in reality, a single entity and whether they have been separated artificially.
https://www.gov.uk/hmrc-internal-manuals/vat-single-entity-and-disaggreg...

Thanks (0)
avatar
By Paul Crowley
10th May 2021 13:32

I explain the issue and let client decide
If company 2 clients are VAT registered, what is the point?
If company 2 clients are not vat registered but all resources belong to company 1 it is not difficult to see the HMRC side of things, particularly if company 1 is currently doing the same work as company 2 intends to do

Worse if co 2 has the same accountant as co 1
Is company 1 going to make VATable charges to co 2? Use of VAN and equipment?

Thanks (0)
VAT
By Jason Croke
10th May 2021 13:48

Like Paul, my approach is explain the rules and risks and then let client decide.

The weakness always seems to be in under appreciating the amount of effort required to build sufficient defence from a HMRC attack. If Company A has all the vans and tools, then Company B cannot just use all these assets for free and at the same time plead it is not connected to Company A.

HMRC will need to prove economic, financial and organisational links. So straight away Company B having common customers with A and using A's equipment we have financial and economic links and with the same Director we have organisational links, a full house which is what HMRC need to see to attack the structure.

Have a read of this, its useful guidance on how HMRC approach this topic (most HMRC guidance on this is redacted/not published).
https://www.gov.uk/government/publications/statement-of-practice-4-1983/...

Nothing is impossible, but having market value leases and hire agreements for vans and machines, a share of the rent and utility bills and separate websites and telephone numbers to create the arms length you need, often is too much hassle to achieve what is likely to be a modest benefit. Where businesses succeed is sticking to the rules and keeping things arms length, but where businesses fail is when after 6 months they can't be bothered raising rental invoices anymore and just stop recharges and that opens the door.

Thanks (1)
avatar
By paul.benny
10th May 2021 13:51

Why does client want a second company? There seems to be a widespread misconception that multiple small companies is somehow a good thing, a sign of status, or even necessary (for some unspecified reasons).

Thanks (0)
RLI
By lionofludesch
10th May 2021 16:08

To be honest, if the fella runs his two businesses in the fashion you describe, he'll soon get fed up of maintaining the records he needs to show to HMRC that the companies are independent.

And, of course, if he doesn't maintain them, he'll be wasting his time having two companies.

Thanks (0)