“Can I split my business into separate entities to avoid registering for VAT, therefore charging less than my competitors?”
This question is commonly asked when clients approach the turnover threshold for VAT registration, or (as now) when there is an increase in the VAT rates. Clearly embarking on such a course could have considerable VAT consequences and therefore it is not surprising to discover that there is both legislation and HMRC Revenue & Customs policy on the subject. Obviously where the separation is artificial then this is a form of tax avoidance. HMRC look at a variety of factors in determining whether or not there is a genuine separation:
- The intention of the taxpayer.
- Whether a genuine effort has actually been made to separate the business.
- The extent to which there are financial, economic and organisational links between the two separated businesses.
Normally, splitting businesses is not recommended as it will normally be challenged by HMRC. However, that is not to say that in the right circumstances and for the right reasons that it is impossible. It needs to be done properly and with thought. Bearing in mind the new VAT penalties, we would recommend that appropriate advice is sought beforehand.