VAT Dangers of Business Separation

VAT Dangers of Business Separation

There is a seemingly endless debate about whether the £85k VAT registration limit creates an obstacle for small businesses.  This was brought out again in the surprisingly successful tribunal appeal made by Darren Vaughan (TC06910).  Although he had a very lucky escape, the clear lesson from the case is the VAT dangers of business separation.

The argument underlines the need to be extremely careful and organised if you are involved in more than one business.  Especially where not all of them are VAT registered.  In this case Mr Vaughan worked as a plasterer working primarily on a B2C basis via a non-VAT registered sole proprietorship.  He also worked as part of VAT registered partnership with his wife supplying B2B floor screeding services. HMRC argued that the partnership VAT registration should cover both activities so that VAT also fell due on sole proprietor income.

Despite the tribunal describing the separation of the two businesses as ‘not being complete’ and purchase invoices frequently being addressed to the wrong entity, the tribunal decided there were in fact two separate businesses.  The case was helped by different services being supplied by each of the two entities and serving a different category of customers.  Nevertheless Mr Vaughan should consider himself very lucky.

How to make it safer

It would have been possible to create much more robust arrangements by ensuring the complete and ongoing separation between the two businesses.  This should include control of purchase invoices, banking, invoicing, marketing and admin.  In these types of situations you must adopt the mindset that you neither know nor trust the other business and implement trading and accounting arrangements accordingly.

It is also useful to have different key personnel involved in each business without them having any cross-over responsibilities.  Better yet is if the key personnel have some degree of ownership and/or profit share limited to the business they work in.  Adopting this kind of approach gives each of the two businesses a more certain way to demonstrate their separateness.  Being able to show they have non-VAT related, commercial reasons why the two (or more) entity structure was established can only help when resisting any disaggregation challenge from HMRC.

If you’re not sure if your business arrangements are safe, please get in touch and we will always be happy to help.  Remember the VAT dangers of business separation.

Posted in VAT Appeals.