VAT is chargeable on a person and not on a trade. Thus, if one person operates two separate trades then they are one business for the purposes of VAT. Separating a business into different parts operated by different persons is called “disaggregation”, and there are rules preventing this if there is a resulting avoidance of VAT.
Usually, disaggregation falls into one of three categories:
- Functional, for example wet sales and catering in a public house
- Geographical, for example a chain of laundrettes
- Temporal, for example one spouse operating a takeaway during the week, and the other spouse operating the same takeaway at weekends.
Temporal disaggregation also includes circumstances where one person operates a business for a limited period, after which it is run by a different person.
The anti-avoidance legislation states that where there is an artificial separation of activities, and that separation results in an avoidance of VAT, then a direction can be issued that the various businesses are treated as one business for the purpose of VAT. It is not relevant whether there was an intention to avoid VAT, simply that VAT was avoided.
In determining whether or not the separation is artificial, HMRC will look for:
- Financial links between the businesses
- Economic links between the businesses
- Organisational links between the businesses
Before they issue a direction that they are treated as one business for the purpose of VAT HMRC must normally show that there is at least one link between the businesses in each of the above categories.
In order to increase the chance of creating a successful separation for VAT purposes then the two businesses should, as far as possible, have:
- Separate bank accounts and financial records
- Separate telephone numbers, websites, e-mail addresses, etc Separate premises or, at least, separate floor space
- Separate payrolls and employees Separate IT systems, plant, fixtures, etc
- Separate stock
It is important when the contract is actually made with the customer that the customer knows which business he or she is dealing with. it is important to remember that unless there has been a deliberate attempt to evade VAT then any direction only takes effect from the date it is issued and does not impose any retrospective VAT liability. Also, any decision made by HMRC on this issue is not always clear-cut, and HMRC can get it wrong. We have recently been successful in overturning a direction by HMRC to treat two businesses as one for VAT purposes.
We can advise on your company’s tax needs