Not so ‘Grand’ artificial separation

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The Grand at Folkestone is said to be a magnificent suite hotel on indisputably the finest maritime promenade in the world.

But it was the location for an involved VAT arrangement that artificially divided its activities into 6 separate businesses, of which five were limited companies, and the sixth a partnership. HMRC took an interest in the PAYE and VAT affairs of these businesses. Decisions in relation to both were Appealed. The PAYE decision is here: and I did note that the penalty was increased by the Tribunal.

The VAT decision  ( ) is not easy to follow. It is light on the operation of the businesses, although these details are found in the PAYE decision (para 4(8)). The activities of essentially a single business were apportioned into 7 separate legal entities (one company appears in the PAYE decision but is not mentioned in the VAT decision). HMRC took the view, quite reasonably, that the separation was artificial, and that the 6 legal entities should be treated as a single taxable person for VAT purposes.

Reading the decision, I noted that HMRC issued, then withdrew, and then re-issued a number of essential documents. This messy process, coupled with changes in penalty legislation, doubtless left the taxpayer confused! What is clear, however, is that the artificial separation issue was dealt with by a historic assessment, AND a Notice of Direction, requiring all 6 businesses to be treated as a single taxable person. This latter Notice (issued under VAT Act 1994, Sch 1, para 1A) cannot be back-dated, which is why a historic assessment was raised. Additionally, a deliberate and a careless penalty were issued, but it was unclear as to the exact reasons for this. Total VAT and penalties were around £135,000.

I was interested to note that HMRC did issue a ‘deliberate behaviour’ penalty in respect of artificial separation. This must stand as a warning to other taxpayers who enter into such artificial arrangements to avoid VAT.

It is worth reminding readers that an Appeal against a Notice of Direction can only succeed if “HMRC could not reasonably have been satisfied that there were grounds for making the Decision.” That does present the taxpayer, on Appeal, with a much harder task to overturn the Decision.

The taxpayer did engage Counsel to argue his case. I was not over-impressed with his arguments (although he had little to work with!), and these were readily answered by HMRC’s presenting Officer.

There was some reduction of the penalty. But overall the grounds of the assessment(s) and the various calculations were upheld by the Tribunal.

About Les Howard


Hi, I am a VAT Consultant, working mainly with charities. I am based in Cambridgeshire

I have over 20 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.


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