Business splitting takes place when two business trade independently of each other under different legal entities. This could mean that neither businesses could exceed the VAT registration threshold.
For example, a computer consultant decides to form a partnership with her wife for the activity that relates to buying and selling computer hardware. He then decides to keep the consultancy services under his own name as a sole trader.
Legislation
There is legislation that covers instances of ‘artificial separation’ that result in the avoidance of VAT.
HMRC could ignore the business split if it can be proved that the two separated businesses have financial, organisational and economic links. This means that HMRC would need to prove all three links between two entities, one or two links is not good enough.
HMRC must also be able to show that a motive of the business split was to avoid paying VAT rather than a commercial decision by the owners.
If HMRC can prove all three links, it has the authority to issue a direction to treat the separated businesses as a single partnership and register it for VAT.
Key Features
If two independent businesses trade from the same premises, where there are no friends or relatives that overlap either entity, the following arrangements should take place:
- Separate bank accounts, records and sales for the two entities
- Any shared overheads will be recharges at a normal commercial rate
- Both business will have their own suppliers relevant to their own activities
Each business will have their own trading name, complete and declare the relevant tax returns for which it is responsible, and distribute or retain the profits it earns
Advance Planning
Family businesses that trade independently and for very good commercial reasons, there is no reason why one cannot support the other as long as it is done on normal commercial terms.
For example, a father and son trade as a partnership running a VAT registered car repair business but his son wants to venture out by forming his own activity of buying and selling car parts online as a sole trader. The father decided to give him a loan for him to be able to purchase his stock.
As long as the son’s annual taxable sales are less than £85,000, he will not need to register for VAT.
If you decided to split your business, it’s important to operate each business on a completely independent basis to prevent a challenge from HMRC. The key is to also ensure that there is as little overlap and interdependence as possible.