Business News
Think before you split for VAT
Tax planning in the wake of the rise of VAT has not gone unnoticed by the Taxman, and whilst not always a bad thing to do, make sure you have checked feasibility and liability against yourself to make sure you are not stung for artificial separation of your business for VAT purposes.
If this is news to you, some business owners have taken decisions to split their businesses in order to fall under the compulsory VAT registration threshold, as they are then in essence two separate entities. If you have checked through some of the points below and can justify this and provide validation, then this is of course a right and true thing to do; however if you cannot be sure, the Taxman is aware and keeping a watchful eye over those that are put through incorrectly - or worse still – knowingly wrong.
An example of businesses that may become split in this way is a VAT registered farm that is hosting a bed and breakfast run by a family member from the same place, but not VAT registered. The Taxman will rally against the two being separate entities if he deems some of the buildings on the site to be used for both functions and therefore the business should come under one VAT consideration. He will always deal with each business case by case, and will have to consider many factors before making such a judgement. Plus, of course, there is a right to appeal if you feel the perception of the businesses has not been portrayed correctly. If all factors presented by the separate businesses steer to them being so, then the recommendation should be that VAT is not combined under one umbrella.
If this is sounding familiar to you, and you would like to consider your situation for numerous businesses in this kind of environment, there are some points to consider:
· If your business has obvious and intrinsic links to other businesses making it realistically one business, such as catering and wet sales within a restaurant or public house, then you should consider this one business and not attempt to split for VAT purposes
· Is the business using a centralised function or resource but still designed to run as a separate entity such as franchise businesses?
· Are you running a quasi partnership? If so this could in reality be one business carried out in two separate divisions, but would not validate being split into two separate businesses
· Look at your independency of the businesses, legally, technically and of resources so you could put your case forward for non combined VAT
· In addition to the above, look at how the business owner could prove autonomy of the running of the business by way of stock control, premises access, banking and sales
· If you or the business owner have registered income tax or corporation tax for the businesses, has this been done separately, is there distinction between the businesses?
· Look at the relationship of the business owners – are they/you working as part of a quasi partnership with a partner or spouse or assisting in a more casual nature?
Don’t be lulled into a false sense of security by assuming that having two LTD businesses will automatically put rights to a non combined VAT cost, as the Taxman still has the power to recommend and implement that two or more businesses should be treated as one should the factors present in that fashion. Make sure you check through your structure and check yourself through the points made above; HMRC can guide you through what would be deemed appropriate and make sure you do not fall foul of re-aggregation of split businesses where mistakes have been made.
