Splitting business activities between husband and wife, or business partners, so as to have some or all activities outside of VAT has long been popular for B2C type businesses – not surprising giving the savings that can be achieved.
However it needs to be planned and executed properly, and attention paid to detail.
A recent Tribunal report HR Patrick and JR Patrick TC1699) illustrates some pitfalls.
Here we had a farm, run in husband and wife partnership with traditional farming activities and also a haulage business and self catering holiday accommodation.
Separately the wife run a bed and breakfast business from the farmhouse.
The farm partnership was VAT registered, the B&B wasn’t.
HMRC ruled that the B&B should be treated for VAT as part of the partnership – i.e. VAT had to be paid on its turnover.
The taxpayers appealed and lost. HMRCs reasons for the aggregation ruling included:
~ both the farm bank account and the B&B bank account were in joint names
~ the same bookkeeper employed for both businesses
~ money transferred between the two accounts
~ the self catering accommodation and the B&B were on the same web site and presented to the public as the same business
~ the same building was used for the self catering accommodation and the B&B
~ there was a combined insurance policy covering both businesses
~ the farm would not have been viable with out the B&B income.
Some of these are scraping the barrel a little, or a case of HMRC kicking someone when they are down, but the killer was probably the shared web site and the presentation of the self catering accommodation and the B&B as the same business.
In such circumstances HMRC can make a direction prospectively that the businesses be combined for VAT.
If HMRC can establish the original split was without foundation and was a fiction that never existed, then they can also make a retrospective direction – the taxpayers were probably thankful HMRC didn’t go down that route.
The lesson is, if you are spliting businesses pay attention to detail. Making sure customers are aware of the seperate business arrangements is probably the biggest issue – separate adverts, separate contracts, separate phone lines. Look critically at all details though, including behind the scenes operational matters – done properly disaggregation can work satisfactorily but they need close attention.