Neil Warren considers the tribunal win for husband and wife hairdressers who traded as separate sole trader businesses, not as a single partnership as HMRC claimed.
On the face of it the case of Graham and Christine Belcher (TC05891) appears to be one of a business splitting in order to avoid VAT registration. I believe the taxpayers were very lucky to convince the court that they did not trade as a partnership.
Graham Belcher traded as a barber from 1991, and his wife Christine traded as a ladies hairdresser part time from 1997 to 2005, and then moved to full-time when she quit her job with the DSS in 2005. HMRC registered the Belchers as a partnership from 1 January 2006, on the basis that the combined turnover of the two businesses exceeded the registration threshold on 30 November 2015.
The Belchers claimed that they traded as independent sole traders, with the turnover of each entity being less than the threshold. So what factors led HMRC to the conclusion that they traded as a partnership?
The Belchers completed a partnership self-assessment tax return each year. They also had one trading name (Crewe Cuts) and traded from the same address where they lived. Their accountant produced one set of accounts in the name of the partnership. They had only one business bank account, a single insurance policy and one music licence covering both businesses. Suppliers dealt with the Belchers as a single entity and there was only one telephone line that served them both.
The net VAT owed was £136,691 and HMRC also issued a late registration penalty of £15,829. HMRC went back 10 years with the late registration, using their power to go back up to 20 years if a business should have been registered in the past.
Mrs Belcher maintained from day one of the HMRC enquiry that she and her husband traded independently as sole traders. The judge admitted that he was “very impressed” by her consistent argument that there was not a partnership in place.
- There were separate tills, and expenses were paid from the respective tills for that part of the business only.
- The hiring and firing of staff was done independently;
- She told the tribunal that if either business was sold, this would be the sole decision of the owner for that part of the business and not a joint decision as a partnership.
The tribunal had to decide whether the Belchers traded independently or as a ‘single economic activity’ and noted that there had been “no conscious intention to run a single business in partnership.” Overall, it was satisfied that there were two businesses, despite factors such as the single trading name and self-assessment tax returns being submitted as a partnership.
I have to admit that if an accountant contacted me and asked for my view about this situation, I would have said without a moment’s hesitation that the set-up was a partnership. After all, the Belchers must have known they were reported as a partnership on their self-assessment tax returns. I also feel the banking and supplier arrangements were very conclusive.
This case was decided at the First-tier Tribunal (FTT), and as such it does not form a binding legal precedent which must be followed by other FTT cases. However, it can be quoted to support arguments in other cases. So this result gives some scope to negotiate with HMRC if they come knocking at the door with similar challenges,
Having said that, the main objective for any VAT adviser should be to create total independence between related businesses as soon as trading starts. The commercial reality of a structure is very important and any trading between the entities, or sharing of overheads, must be done on an arms-length basis. This can be particularly challenging where families are involved because there is less financial incentive in place in most cases to keep things separate.
But well done to the Belchers… this was definitely a victory against the odds!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.