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If it looks like an elephant and it sounds like an elephant…

Ross Bartholomew

02 April 2018

In over 30 years advising on the finer points of VAT, I have encountered an endless variety of attempts to circumnavigate a common tax issue. Disaggregation, or the artificial separation of businesses, is where more than one entity is created to reduce what would otherwise be a higher turnover in one business solely to avoid VAT registration. But, beware, if it looks like one business and sounds like one business, HMRC will not be fooled!

There are a few ways in which businesses can legitimately use disaggregation, but the best way to check is for businesses to carry out a series of tests. This should prevent HMRC issuing a direction which enables them to look into the business and decide if the separation is legitimate.

The tests most commonly cited by HMRC when attacking arrangements of this nature vary considerably but generally fall into three categories:

  • Financial links – for example, using the same bank account or accounting records
  • Economic links – such as the same circle of customers, using the same advertising or phone numbers
  • Organisational links – common management, staff or equipment.

Whilst none of these in isolation are likely to be persuasive it can be very difficult to rebut accusations based on a combination of these factors. Even though the tests may be complex you can generally identify whether a situation really involves one or two businesses very early on.

I’ve seen in my time a snooker hall with 21 limited companies running a table each. I’ve seen a nightclub operated by seven different companies, Monday Limited, Tuesday Limited – you get the picture. I’ve also experienced dozens of hairdressers and taxi driving arrangements as well as numerous pubs with one partner running the bar and the other the catering operations. I would like to have said these avoided the VAT net with varying degrees of success but this unfortunately would not be true; the vast majority which are genuinely not separate businesses are intercepted by HMRC.

It should also be borne in mind that, for obvious reasons in light of the above tests, it is far easier for HMRC to challenge an existing business effectively splitting as it approaches the VAT threshold (currently £85,000) than it would be for them to force two start-ups to merge together.

It just goes to show that sometimes it’s not a case of how imaginative you can be in planning your tax affairs, it’s simply that HMRC will get you in the end. Often with very painful consequences if this planning falls foul of their own interpretations of what’s allowable and what isn’t.

The moral of the story is that danger lurks for anyone trying to be overly inventive and that, needless to say, there are expensive sanctions for getting it wrong. Perhaps a quick chat with a VAT adviser at Wilkins Kennedy in the first instance could save significant pain later on?

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