Separation

[tomdhu]

After retiring, I started an e-commerce business selling hardware via Ebay and via my own web site. Before too long it may exceed the £85,000 VAT threshold.

I have no desire to get involved with VAT at my stage in life, so was wondering if the following arrangement would work with adult my son who lives at a different address.

1. I sell him the web site through which he markets the same products.
2. He buys his stock direct from the same supplier that I use.
3. He consigns that stock to me and I package and despatch it on his behalf to his buyers.
4. I charge him a management/handling fee for every package that I despatch on his behalf to his customers.
5. He keeps the margin between product cost and retail as his profit and he pays tax on that profit.

Is this sufficient separation to avoid being accused of dis-aggregation?

[darthblingbling]

Sounds like you're just shifting the VAT burden onto your son?

The threshold is based on turnover, not profit.

If you're looking for a simpler VAT regime then the 718 Margins Scheme may be applicable to you if you're selling used goods. But VAT is not my speciality by a long shot.

[les35]

The short answer to your question is 'no.'
Does your son want to run a VAT-registered business or not? If so, then you could transfer the business to him, and perhaps draw a commission for your work to set it up.

[Trevor S]

Perhaps I've misread the original question. But as the title is separation, I'm assuming the proposed arrangement is that:
- parent sells website to son, but retains eBay site
- son and parent both buy goods for their sites
- parent provides an order fulfillment service for son
- son's turnover is that from website sales, parent's turnover is from eBay sales plus charge for fulfillment service, both son and parent are each below £85k.

But even if I'm right, I think that the separation may still be seen as artificial. It would still outwardly appear to be a single business. The vast majority of the work in both is being done by the parent and I expect in reality the parent may control both.

Now if the website and eBay site were separately branded, entered into separate arrangements with potentially different suppliers, were genuinely controlled by their owners, and didn't dispatch each others orders, there would be a greater chance of them being accepted as two separate businesses.

[tomdhu]

To explain further..

1. I would retain the Ebay activity -using an Ebay account with a different name from the web site.
2. My son would buy the web site from me and maintain it, manage it and take the orders from it.
3. He would receive payment from his customers on his web site.
4. He would pay the manufacturer of the products he sells, directly.
5. The product he orders from the manufacturer would be consigned to me in bulk.
6. He keeps the profit between the cost price from the manufacturer and the retail price he sells for.
7. He would the advise me of the orders he receives and then contract me to check, package and despatch these orders on his behalf.
8. He pays me a fee for the contracted work plus materials, packaging and postal costs.
7. This would be like a "drop-shipping" arrangement that some people use with Amazon
8. There is only one manufacturer for the brand of product , so we would both have to buy from the same supplier.

This arrange would see me effectively devolve ( detach) the bulk of the revenue to a third party (my son) who would be running his own business - which pays a contractor ( me) to do the manual work on his behalf because he does not own suitable premises.


The other option would be for me to keep the web site and him to take on the Ebay activity and then contract me to process his Ebay orders.

Does this all make sense?

[Trevor S]

Thanks for the clarification - so the arrangements would be largely as I assumed.

First point- whether its the website or the eBay site that you chose to retain won't make any difference to whether they're accepted as separate businesses.

I'm still of the opinion that you may struggle to convince HMRC that the businesses are truely separate, rather than it just being your son joining / buying into a family business and being allocated an area (e.g. website sales) to work within. Some questions to ask yourself, or be prepared to answer if HMRC ask you, may be:

- would you be entering into this arrangement if your turnover was likely to remain safely below the registration threshold?

- would you offer the drop-shipping arrangement to any other direct competitor to your eBay business on the same terms?

- would you sell your website to any other potential competitor to your eBay business on the same terms?

- would your son have full control / be the sole decision maker in respect of the website business? For example, could he add to or change the range of products sold, or change pricing to differ to that on your eBay?

- would your son be free to chose to use someone else to provide the drop-shipping service?

Ultimately, it's down to whether you and your son can convince HMRC that you have separate independent businesses. The more commercial the arrangements, the better chance you stand - but there has to be a very high risk that HMRC would consider it to be an artificial separation.

Also consider what impact the transaction of selling the website and associated stock would have on the turnover of your remaining business. If you attach a commercial value to this transaction, would you be over the threshold anyway?

[tomdhu]

Great reply - that does clarify matters a great deal.

I have actually started to offer the business for sale on the RightBiz web site - largely because I am now 74 and want to do a bit less.

If my son is interested then I would naturally offer it to him for less than Joe Public hence sale of the web site only would not tip me over the threshold but if it got too close, I would just stop selling for a bit.

The attraction for him is that If he is ever unemployed, he could take it on full time and develop it. Giving him the web site only would allow him to learn on the job which would be worthwhile later. Once he take the web site on , he would have full freedom to modify it and expand/ diversify the product range. For me the benefit is to ease myself out in two stages and go into full retirement.