Vat Business separation

[DMCM]

I have recently Vat registered a client's Photography & Framing partnership (with wife) business. The application was on a voluntary basis as heÂ’s well under the registration threshold for all his business activity, the voluntary registration was because of supplying Framing to Vat registered businesses. He is also currently selling his photography services to the public and obviously this Vat registration disadvantages this side of his business.

He is considering the following;
1. To start a separate sole trader business which will deal with the sale of Framing which is to the business customers AND to continue to trade as a partnership (with wife) for the photography, obviously not registering it.

This would mean that I would have to change the business name, legal status & banking detals with HMRC for his current VAT registration or cancel it...So as to get the appropriate business Vat registerd.

Other facts - they will have same business premises but he is aware of the need for separate bank accounts, sharing of costs etc.

I am wondering....
1. Would this be considered artificial separation?

2. Would HMRC challenge this arrangement given that he voluntarily registered and isn't required to be registered as long as both together are under the threshold?

3. Is the sole trader / partnership enough of a 'separate' legal entity? Even if its the wife?

Any thoughts are very welcome.
Many thanks
David

[vatexpert]

David

This is the age-old question of what is the artificial disaggregation of a business. The first point to make is that if the combined turnover of the activites is less than the VAT registration threshold, HMRC cannot issue a direction requiring the business(es) to be registered (VATA 1994 Sch.1, para 2(2)(c)).
Having said that, the client is already registered under a voluntary registration of himself and his wife in partnership which complicates things slightly. If the business had not been registered, Customs would not have the power to register it while the taxable turnover remained below the registration limit, so it could be structured in any way your client wanted without interference from Customs.

The bottom line is that there is no reason why a business should not structure itself in any way that it chooses. And so long as there is a good commercial reason for doing so Customs should not interfere. Of course, if Customs feel that the business is being split artificially for tax avoidance purposes they will probably challenge the proposed action.

This then comes back to the question of whether the two businesses are financially, economically and organisationally linked. If steps are taken to remove these links so that the two businesses are totally at arms length, then it is unlikely that Customs will pursue the matter, since they are aware that if the matter were to go to appeal, these links are what the tribunal would be required to examine.

Have a look at Customs' statement of practice on artificial separation in s. 14 of VAT Notice 700/1.

Joe Wilkinswww.vatexpert.net

[Eamon McNicholas]

Given the facts you set out and the idea to maybe split the business - don't go there.

Eamon Mc Nicholas
Tax Barrister

www.EamonMcNicholas.com

[The above is not to be taken nor used as specific advice]