VAT: Parallel businesses win again

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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.  

Surprise win

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.

Déjà vu

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.

The arrangement

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.

Overlapping costs

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.

FTT decision

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.

Conclusion

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

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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By RedFive
05th Feb 2019 13:48

Thank you Neil very useful.

Thanks (1)
06th Feb 2019 09:53

Can we now be blasé about admin errors such as public liability insurance and cross-billing ?

I'm guessing no and my advice will continue to be that failure to keep the businesses separate will give rise to a risk.

Traders got lucky, in my view.

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to lionofludesch
06th Feb 2019 10:18

Definitely agree, while I can see it being possible and even reasonable to split the businesses into separate entities I don't think they did enough to be sure of this result, very lucky indeed.

There's no reason to make such a mess of it either, to my mind it better demonstrates the all important "intent" if they actually treat them as separate businesses and not just let these things slide.

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to Duggimon
06th Feb 2019 10:29

Insurance is something folk constantly overlook. I've lost count of the number of folk who think their van is still insured once they sell it to their brand new company.

Mind you, the peelers probably think it is insured, because they don't re-register it at DVLA either.

Thanks (2)
06th Feb 2019 10:18

This seems a little more believable than the Belcher case. That one really was a questionable decision!

Thanks (0)
to Michael_R_Grant
06th Feb 2019 10:30

Sure - but sometimes it's the little things that tip the scales.

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to lionofludesch
06th Feb 2019 11:43

I think the key here was the separation of sole trader and partnership. The article doesn't go into the wife's role in the second business. Perhaps the intro by Neil Warren is misleading

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06th Feb 2019 10:32

'Vaughan traded as a plasterer, but he also carried out a separate trade providing liquid floor screeding using equipment funded by a council grant.'

I am amazed, they seem close enough to me, bearing in mind builders advertise a range of services on their vans, so going forward what do i advise clients, take a chance and split your businesses, they should get away with it.

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By RogerMT
06th Feb 2019 11:43

Sorry for being a know-all, but the various sayings concerning history are that it is always doomed to repeat itself!
Good article, though. :)

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to RogerMT
06th Feb 2019 16:37

Not quite. The saying is 'Those who do not learn from history are doomed to repeat it'. So if the HMRC took a similar case to court as these two cases and lost, the saying might be apt, depending on the circumstances of course.

Thanks (1)
to quicksox
06th Feb 2019 16:52

"The saying?"

There are dozens of them.

https://www.azquotes.com/quotes/topics/history-repeats-itself.html

George Eliot probably the earliest in this batch. But I doubt if she was the first.

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06th Feb 2019 11:44

He was lucky.

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By vstrad
06th Feb 2019 15:17

Actually, Neil, the old saying is that history does repeat itself. This is Karl Marx's take: “Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce.”

Thanks (1)

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