Neil Warren discusses another case where HMRC failed in its challenge to a trader who had split his business in order to avoid registering for VAT.
There’s an old saying that history never repeats itself, but it certainly did in the VAT world when Darren Vaughan (TC06910) managed to persuade the first tier tribunal (FTT) that he was running two separate businesses rather than a single operation.
HMRC’s decision to retrospectively register him for VAT from 1 March 2013, based on the combined turnover of the two businesses, was overturned. Any HMRC attempt to merge the two businesses into one can now only take place from a current or future date, and not retrospectively, by the issuing of a direction under para 1(a), Sch 1, VATA 1994.
Just over 18 months ago there was an almost identical case involving a husband and wife arrangement (Graham and Christine Belcher (TC05891)). In that case, the couple claimed to be running two sole trader hairdressing businesses, although the lack of organisational division between the two entities clearly indicated they had always traded as a single partnership. They secured a victory by a whisker!
One aspect that raised eyebrows among the VAT community was the fact that the words ‘appeal allowed’ appeared in the conclusions of both the Belcher and Vaughan case reports.
Vaughan traded as a plasterer, but he also carried out a separate trade providing liquid floor screeding using equipment funded by a council grant. He traded as a sole trader until 2012 but as the business grew, his accountant advised him to split the two activities to avoid a VAT problem, thereby obtaining the advantage of two registration thresholds.
Vaughan formed a partnership with his wife for the screeding business, trading as D&C Flooring, and kept his sole trader status for his plastering work. Neither business ever exceeded the VAT registration threshold.
The main problem was that the Vaughans were not watertight in their organisational and financial procedures:
- There was only a single policy for employers’ liability insurance.
- Some suppliers made invoices out to the wrong business.
- In some cases, sales invoices covered both activities eg “plastering of house and laying floor screed.”
- There was also some confusion over sales and bankings.
HMRC’s view was: “only one business has ever existed for VAT purposes”.
However, in favour of the split argument, there were separate bank accounts in place, separate CIS registrations, and the self assessment tax returns completed by Vaughan and his wife reflected both a partnership and a sole trader business.
Instead of placing the emphasis on any of the organisational factors mentioned above, the tribunal made its decision based on the fact that the Vaughans intended to operate two separate entities. Whether they had done this successfully did not seem to be a key part of the judge’s thinking:
“The appellant and his wife very clearly did intend to separate the appellant’s existing sole trader business into two businesses”.
It was noted that the two activities were very different in nature and had distinct customer bases and geographical locations.
The emphasis on the ‘intention’ to have two separate entities in place was also the key factor in the Belcher case - history has definitely repeated itself.
HMRC went for gold in both the Vaughan and Belcher cases, seeking a retrospective VAT registration rather than the safer option of issuing a direction with a current date so that registration was effectively moved forward. The HMRC officers clearly felt (with justification) that the separation of the trades had not been carried out with sufficient care and detail.
Instead of adopting a strategy of “balancing all of the evidence as a whole,” the court has reached its decision in both cases based on what the taxpayers intended to do.
These two cases show that the intention of the taxpayers should always be carefully examined and recorded. Although the FTT cases do not form a binding precedent, you can quote the conclusions if HMRC challenges a business split situation for any of your clients.
As Oscar Wilde may have said: “To lose one business splitting case could be considered unfortunate, to lose two shows signs of carelessness!”
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.