Separate business to reduce VAT?

hairylairy

I have a client who runs a small café as a sole trader, that also has a vending machine in it. I operate the VAT on the Flat Rate scheme. In order to reduce VAT he is considering letting the daughter (who works in the café) run the vending machine and for her to run that side of it as a sole trader. Is there any problem with this? Be very grateful for any advice.

Gem7321

Sounds like artificial separation to me, would advise against it.

hairylairy

Thank you for your feedback, was my feeling too, but client is desperate to improve low profit. Just wondered if anyone had success in doing anything similar and how.

Gem7321

I'm a little confused, how would removing the vending machine improve the profit? Does it make a loss after daughters wages? If so it seems a little unfair to let the daughter handle it knowing it makes a loss!

hairylairy

No, the vending machine takes a lot of money. Removing it would ease the VAT burden from its sales.

Jawz

I would have thought that the vending machine sells food/drinks stuff too right? if that is the case then as Gem7321 stated above, HMRC may view it as "artificial separation" and therefore would deem it as one single business.

There argument could be:

1) both cafe and vending machine and cafe sell food/drinks
2) Both being sold in the same premises.

Gem7321

If it makes a lot of money how would removing it improve the profit? Sorry, I'm still confused.

Is FRS definitely the best scheme for the client?

stevo5678

I agree with the VAT issues raised above. With the reference to low profit I think the OP is merely making the point that less VAT will = more cash (and more profit overall as the money is staying in the business/es and not being paid to HMRC).

payrollpro

Look up the rules on "disagregation" http://www.hmrc.gov.uk/manuals/vatdsagmanual/vatdsag05150.htm but in my view this arrangement would fail the tests to be applied.