We are sometimes asked by our clients if there are benefits of dividing a business into parts in order to avoid registering for VAT. Nicola Roby, Director at CHW Small Business Accountants in Bolton explains.
A company or individual which is not registered for VAT may be more price competitive than one which is as it doesn’t have to pass on the 20% VAT charge to customers. Particularly so where those customers are unable to reclaim VAT.
One perceived “solution” is to split the business into two or more entities, so that each one trades below the VAT registration limit. This is known as dis-aggregation and not surprisingly HMRC are against such avoidance arrangements. HMRC believe that such avoidance is not only a loss to the public purse, but it creates a situation of unfair competition.
Therefore they have powers to add together the turnover of the entities so that they become VAT registered. In this situation HMRC may serve a direction so that the people specified are treated as a single person carrying on the activities described.
Also, HMRC can register a company or person from an earlier date to reflect there was only ever one business run between the various parties concerned. Thus, an assessment for back tax and a penalty could also be issued. HMRC often choose this option and don’t issue a direction at all.
In addition, if a person has been subject to a dis-aggregation order and HMRC believe that there is a further split in the business with a “new” person making supplies, HMRC can issue an order that adds the new person to the registration from the date of the original order.
In some circumstances, it may be possible to split a business but these arrangements often don’t work in practice, and the business owners end up with a lot more hassle, worry and cost – in addition to their VAT bills – than any potential VAT saving. You should seek expert advice before contemplating any business restructuring.
For advice on any this or any other issue relating to small business accounting contact Nicola Roby, Director at CHW Small Business Accountants in Bolton on 01204 534031 or via our enquiry form.
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