If related businesses are trading in parallel there is the possibility that HMRC could argue the turnover of each business should contribute to the same VAT registration threshold (£85,000 until at least April 2020) rather than each business separately. This is known as “business aggregation for VAT purposes”. Put simply rules prevent businesses artificially staying under the VAT threshold by “business splitting” their activities into multiple businesses. HMRC have two ways of attacking such an arrangement:
No actual split
HMRC could find that the separate businesses are not actually trading in their own right. For example if a business person says some of his activities are sole trade and some are inside a company, but the company has no actual bank account, contracts, sales invoices etc, then HMRC would find all activities are actually within the sole trade. If that was the case, HMRC would go back and insist on VAT on all income since the threshold was exceeded, which could be many years in the past.
Assuming there is an actual split of a business between different entities, there can still be a problem. If there are three particular ties between the businesses, HMRC would aggregate those entities incomes from now on and VAT registration would be due immediately. The ties are as follows:
- Economic – Supplying the same circle of customers, the activities of one business benefit the others or seeking to realise the same economic objective;
- Financial – Financial support given from one business to the other or common financial interest in the proceeds of the business; and
- Operational – This means premises, staff, inventory etc are shared between the different entities.
If HMRC find two entities have ALL three ties then their income can be aggregated for VAT purposes. In this case HMRC can only insist on VAT from a current or future date.
If you operate multiple businesses under the VAT threshold, or are considering doing so, it is vital to take clear professional advice.
As with all of our tax tips and web pages this information is necessarily summarised and of a general nature. If you would like detailed specific advice please contact us.