Business Splitting for VAT purposes is arranging a business structure over two or more entities to keep one or more of time below the VAT threshold, and save some VAT.
Unsurprisingly its something HMRC look closely at. Broadly, its legal where there is both a commercial nexus to the structure, and there is a proper separation between the component businesses.
Where the structures lack commercial nexus, or the separation isn’t complete, HMRC can challenge the structure, and either prospectively or, in some cases retrospectively, declare the businesses be treated as one for VAT purposes.
Its important then that if a group of businesses are structured to minimise VAT, that its done properly.
Earlier this summer there was a surprising VAT tribunal on the topic.
It concerned a husband and wife who were both hairdressers. They traded from the same premises, with joint bank accounts, supplier trade accounts and Performing Rights License. Their accountant prepared their business accounts and tax returns as if they were a partnership.
We don’t know the full story, but for some reason despite the aggregate turnover being over the VAT threshold, they were not registered for VAT. HMRC caught up with then, registered them, and sent them a VAT bill for nearly ten years and a penalty.
They took the case to the VAT tribunal. Pretty much any accountant or tax advisor in these circumstances would say their case was dead in the water – as one commentator has pointed out, signing the partnership tax return each year “I, the nominated partner, declare that the information I have given on the partnership tax return is correct to the best of my knowledge and belief” was a smoking gun. They can’t have not known their business was structured as a partnership and the tax consequences, including VAT, emanating from that.
Very surprisingly the judge at the tribunal found in their favour, “there had been ‘no conscious intention to run a single business in partnership”.
The couple were incredibly lucky with this result – and better off by £150,000.
It throws up a couple of interesting points:
It validates that, if the position is strong enough, then splitting a businesses is a successful VAT mitigation tool
The threshold for doing so may be less than is commonly thought
No hope cases sometimes come through on appeal
However, this must have been a trauma for the business owners, and being as indifferent to the basics of VAT and business structure as they were is a reckless approach to business. As a firm, like most accountants, we are still of the belief that a business separation scheme needs a lot of attention to detail and include very clear operational separation.