Can I just clarify something on VAT and separation of businesses?

imeldabye

Hi, have a small partnership who turn over just enough to be VAT registered. They are joiners. Their bread and butter business is the house holder wanting alcove shelving/cabinets etc and they have the occasional big job for businesses and organisations which pull in substantially larger fees. They have been told by another company that it is perfectly "legit" to incorporate, but not to form 1 new company, but to form 2 companies- 1 which is an incorporation of current partnership which would undertake the larger projects and continue to be vat registered. The other would be a new company selling to residential customers. The second company would turn over less and not be VAT registered. Clearly they want to avoid charging VAT on the small jobs because as they have told me the extra cost to the customer is "killing the business". I have told them this is illegal and tax avoidance, and I just want to be clear that I am giving them the correct advice. I've looked on HMRC website and it states that if it's the same people, same trade, same premises then this is artificial separation of business. Or have I not got it 100% correct?
Also- might sound a bit over the top but should I report them for this? (obviously I would resign from the client if they insisted on going this route).
Thanks

ademoore

Hi

Firstly, I woudn't resign unless you feel they are pushing hard for this split of the business, to the point where it will happen no matter your advice. If it got to this point, I would walking away from the client.

I had a similar situation with one of my clients too, and I too, felt they were treading a thin line, and turned the table on them by storytelling an inspection scenario that they could find themselves in, and the fact that they could end up paying out more in penalties and VAT, then they would have had they just remained as one business, which they naturally were. I also told them if they were still keen to split, then they needed to find another accountant.

I think if you clearly set out the 'why's' of your opinion and the risks involved, clients generally appreciate openness and honesty (*generally*! :001_tongue:)

At the end of the day, you can only advise, you cannot enforce, and if the client sees fit to do as they please, then i think you always need to be prepared to walk away.

Good luck!

sdv

Hi

You can always write to HMRC and get clarification. But before you divilge your client's name to HMRC make sure that they have agreed to that. Any advice given should be in writing and a suggestion to your clients that a clarification should be sought from HMRC.

As for reporting, they have not breached any of money laundering regulation that I can think of and therefore there is no need to report to SOCA.

Ofcourse you can also ring the HMRC help line and put a hypathetical question to them.

jamesm96

imeldabye wrote: »

I've looked on HMRC website and it states that if it's the same people, same trade, same premises then this is artificial separation of business.

No, you've got this spot-on. It is a bit of a grey-area in my view; I mean, what constitutes a different trade? It's one thing to have a plumber who has one business carrying out boiler services and a second doing bathroom installations, it's quite another to have one business carrying out management consultancy and another business selling cuddly toys.

I usually try and put myself in the shoes of an inspector and think about whether or not he could justify an accusation of artificial separation. If he could, then don't do it. If you're confident that the business are genuinely (rather than artificially) separate then there's no problem.

As others have said; all you can do is advise and, if they won't take your advice, resign. If you wanted to report you could call the HMRC hotline for tipping off to inform them of a business which is deliberately failing to complete a VAT registration.

It's not tax avoidance, though. Avoidance is legal - it's where you exercise your legal right to arrange your affairs in such a way as to minimise your exposure to tax, a bit like when a sole trader incorporates so that he doesn't legally have to pay NI on his drawings. Evasion is the illegal one - where you deliberately don't pay tax which you are legally required to (such as a sole trader reporting profit of £10,000 to HMRC when it was actually £20,000.

JJH1969

I agree with Mike. I was on a course last weekend and another AAT MIP told me they incorporated 2 businesses for husband and wife to avoid VAT registration for both companies! :ohmy: