Can I split my business to avoid charging VAT? To find out watch our latest video here or read the blog below.
You must register for VAT if your turnover exceeds £85,000 or you know that it will. This is everything that you have sold that is not exempt from VAT.
A common myth is that you can split a business up to keep below the threshold, for example split a £100k business into two £50k businesses.
HMRC will not allow you to artificially separate your business in order to keep your business below the VAT threshold hence avoiding registration.
If HMRC believe that your business has financial, economical and organisational links and the purpose of the split was to avoid registering for VAT, they can force you to register.
When can I split the business?
Here are some indicators that HMRC will bear in mind when judging if your businesses in fact separate entities.
- You should have separate bank accounts and accounting records
- Marketing and advertising of the business should be separate
- One entity should not be financially dependent on the other
- The businesses should have a different customer base
- Transactions need to be separate. For example, if the businesses share premises then the overheads must be split. Meaning a cash transaction must take place. It cannot be just an accounting entry.
In one real life example a husband and wife operated two businesses from the same premises. In this case they operated a pub and a B&B in the same premises. The wife paid 35% of her takings to her husband. This was considered a realistic, commercial, arm’s length contribution to the value of the shared premises and utilities. In this case the businesses were declared separate.
What happens if you get it wrong?
If HMRC consider that your businesses are in fact a single entity they will require you to register for VAT. If they deem your businesses were never intended to be separate entities, they can order you to backdate registration and pay all the VAT that would have been due.
I hope you found this useful. If you would like to know any more, then please contact us on email@example.com or by phone on 0151 380 8081.