Avoiding registration by splitting

So your business is growing. You want to avoid having to register for VAT. The golf club gossip is that you can avoid registration and save VAT by splitting your business. Is this true?


Close to VAT threshold A common problem for a small business dealing directly with the public and approaching the VAT registration threshold (currently £73,000), is how can they pass on the 20% VAT charge without losing business or reducing profit by absorbing the additional cost themselves.


Example V Gogh is a one man band painter and decorator dealing largely with private individuals. Lately, he's also been winning some commercial contracts and this pushes him close to the registration threshold. If he registers, he'll have to put up his prices to domestic customers by 20% or absorb it. Can he avoid VAT registration?


Split the business He could split the business in two, one part dealing with commercial contracts and the other with work from private individuals. How can he achieve this without upsetting HMRC?


TIP If he's going to split the business, it must be real and not just on paper. He needs to set up a limited company or partnership to deal with the commercial contracts while continuing to run the domestic side as a sole proprietor. Each side - commercial and domestic - has its own bank account, accounting records and purchases are all made through the correct legal entity  and NOT by having a common stock for both businesses.


What can HMRC do? If he does all this and continues doing it, HMRC can only issue him with a direction ( a disaggregation direction) to treat the businesses as one from a current date. 


TIP If he splits the business properly. he can still save all the VAT up to the time HMRC issue him with a direction.


Beating HMRC If he can show HMRC the two businesses are not economically connected, he may avoid registration altogether (assuming both businesses remain below the registration threshold). For example Wilf, a sole proprietor runs a gas fitting business and sells used cars on the side. The combined turnover of both businesses counts towards his VAT registration threshold. However, if he puts one into a limited company or partnership the turnover of each business will be looked at separately and HMRC cannot direct them to be treated as one.


WARNING If Wilf gets it wrong....doesn't have separate bank accounts etc, HMRC will say there never were two business and compulsorily register him from a much earlier date. Wilf will then have to account for all VAT on all the turnover of both businesses from the day their combined turnover exceeded the VAT registration threshold, plus penalties and interest.


TIP This type of VAT planning is common in the licensed trade where, typically, the wife runs the food side as a separate, unregistered business. If you are doing something similar (sharing premises) make sure you charge rent   to the unregistered business in exactly the same way as you would to a third party.