Independent VAT Consultant
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VAT: Another business splitting win for taxpayers

A café run by Charles Caton and a restaurant run by his wife KC were ruled to be separate businesses for VAT and both trading under the registration threshold. Neil Warren compares this result with the Belcher case, which resulted in a similar outcome.

20th Sep 2019
Independent VAT Consultant
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cafe outside seating

I had a definite feeling of history repeating itself when I read the case of Charles Caton (TC07343). This was a business splitting case about a husband who ran a café and next door his wife ran a restaurant, with both entities trading below the registration threshold.

HMRC thought Caton was the owner of both entities and should have registered for VAT from 1 December 2009 because the combined turnover exceeded the threshold.

The facts were very similar to the Belcher barber and hairdresser case (TC05891), where the husband and wife ran separate sole trader entities from the same site. They both traded below the £85,000 registration threshold but HMRC claimed there was a single business.

Same result

HMRC lost the Belcher case, despite a lot of factors indicating there was only one single business trading above the registration threshold: common telephone lines, the same trading name and even the completion of a partnership self assessment tax return.

HMRC also lost the Caton case, despite a lot of factors indicating there was only one business such as a single website. Mr Caton bizarrely said in an HMRC questionnaire that he owned the restaurant and his wife was an employee, and all card payments for both businesses were banked into his account.

Tribunal thinking

There is no doubt that all business splitting arrangements are unique and need to be considered on their merits. As the judge commented in his report, “each case clearly turns on the facts.” But the common theme of the two cases, which is relevant to both the taxpayer victories, is that there was a clear intention on the part of the owners to run separate entities.

“Mrs Caton wanted to ‘do her own thing rather than rely on John.’” (Caton case)

 “There was no conscious intention to run a single business in partnership.” (Belcher case)

Business intentions

The ‘clear intentions’ of the Catons and Belchers won the day ahead of some of the own goals they scored. The did not have watertight arrangements in terms of separate record-keeping, bank accounts and websites.

In reality, Mr Caton had to deal with some of the restaurant issues because his wife was from the Philippines and had limited English when she first came to the country. But the commercial reality was that she ran the show at the Waterfront Restaurant and her husband was top dog at the Commonwealth Café.

The law

I recently spent some time analysing a husband and wife business splitting situation, only to belatedly discover that the issue was irrelevant because the combined turnover of both entities was below the VAT threshold, and this would always be the case. This scenario is clearly dealt with in the legislation, namely that HMRC’s powers to treat separate entities as one business will only be used where there is ‘artificial separation’ carried out, ‘resulting in an avoidance of VAT.’ (para 1(A)(1), Sch 1, VATA 1994). No VAT loss means no HMRC interest!


First tier tax tribunal decisions such as the Caton and Belcher cases are only binding on the parties involved in the case. But advisers now have two husband and wife success stories to quote on this controversial subject if HMRC ever coming knocking.

However, my advice is still to make every effort to ensure that all dealings between the two businesses are made on an arm’s length basis if possible, to avoid a challenge from HMRC in the first place.

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