VAT segregation of businesses

JodieR · August 2012

Client owns a small shop & turnover is comfortably under the VAT threshold.

Her husband has recently been made redundant & they are looking into opening a second shop. They were both declared bankrupt last year so I don't think that they can set up a Ltd Company, but if they were both registered as sole traders and each ran one of the shops (with separate bank accounts, trading names, staff and even possibly accountants) do you think there's a danger of HMRC trying to say that it's one business which has been artificially separated for VAT? The stock ranges would be similar but one shop would have a wider variety.

It's also going to make a difference to the business rates they pay whether it's one business or two.

The relevant VAT notice reads:

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

... i'm just not sure to what extreme HMRC take this.

T.C. · August 2012

Firstly instinct, I would say yes. But if they had separate business names, separate premises, separate bank accounts and completely difference customers, perhaps this would be ok. Interested in seeing other opinions on this one.

Newbie · August 2012

Ownership and control is another factor to consider, I think you have to use common sense in the cases, see link below from 13.3 onwards for chapter and verse http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&id=HMCE_CL_000086&propertyType=document#P556_61743

JodieR · August 2012

Thanks newbie, I had read all of that I'm just not 100% sure on how it's interpreted:

13.6 The meaning of financial, economic and organisational links
Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

financial support given by one part to another part none
one part would not be financially viable without support from another part no
common financial interest in the proceeds of the business. well they're husband and wife eventually their earnings will be 'pooled'

Economic links

seeking to realise the same economic objective to make a profit, nothing more specific
the activities of one part benefit the other part no
supplying the same circle of customers. no, due to geographical location
Organisational links similar structure and common suppliers

common management Each would manage their own shop, but probably share ideas/policies etc
common employees no
common premises no
common equipment. only the car to visit the cash & carry but she's always just claimed mileage in the past

I think they'll be alright but would be great to hear if anyone's got clients with a similar set up.

jamesm96 · August 2012

Newbie wrote: »

I think you have to use common sense in the cases

I agree with this. The rules on artificial separation are there to prevent people from splitting a business in two to stay under the VAT threshold, which is not what these guys are doing. The husband is genuinely starting his own business.

I've always thought of it in terms of 1. People 2. Premises and 3. Equipment. If two businesses are using the same people, working from the same premises and using the same equipment, then you've got a flippin hard job to prove that it really is two separate entities. Equally, if none of those resources are shared, and you even use different business names... etc, then I'd be very surprised if HMRC came back with anything negative to say about the architecture.

Don't forget, too, that HMRC's VAT guidance has its own definition of 'taxable person'.

VAT segregation of businesses

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