Registering for VAT can be compulsory (see VAT SERIES - The Registration Threshold And The Dangers of Missing It) or voluntary. Why would someone chose to register for VAT voluntarily? Typically if all your customers are VAT registered and able to reclaim the VAT you charge them it won't affect how competitive your pricing is. It will also allow you to reclaim VAT thereby reducing your business overheads and increasing your profit margin. But what if your customers are not able to reclaim VAT? This can present a real challenge as VAT registration will either increase your fees by 20% or you may feel the need to absorb some, if not all of the cost yourself. Understandably for such businesses the idea of having to register for VAT is not very welcome.
As a result a question many will ask as they begin to approach the mandatory registration threshold is 'can I just set up a new business, in a different legal entity, under a different name to keep both businesses under the limit?' Usually this will be accompanied by a description of how one business will charge for a certain element and the other business will charge a separate aspect of the supply.
Does It Work?
The answer will really depend on the facts but quite often the attempted split is artificial and will therefore not work. If an artificial split were made and later discovered by HM Revenue & Customs they can essentially ignore the split, treat the entities as one and determine the mandatory date of registration. Typically this will not be a retrospective registration but HMRC can attempt to backdate a registration so care should be taken.
So the question on everyone's mind, what makes a split artificial and what is a legitimate use of separate business entities.
Artificial Split
As mentioned before each real life case will need to be examined individually as a number of factors should be taken into example. But for the sake of an example consider the following which would most likely fail as an attempt to split a business activity.
Say Tim is a window cleaner, he does some commercial work as well as residential homes. A number of his residential customers have also asked him to do gutter clearance and a few extra bits so the income has jumped. As a result the business is very close to the registration threshold and Tim forecasts it will exceed this in the next 3 months. He wants to know if he can use two entities, one to bill commercial customers and the other to bill residential homes. Both would then trade comfortably under the threshold but Tim has said he wouldn’t mind registering the commercial entity for VAT if this helps.
Some additional facts. Although each business will have it's own name Tim will use the same equipment, van, phone number and office space to operate. The work carried on is really the same but artificially split on the basis of the type of customer. It's very unlikely Tim would succeed in arguing his case.
Genuine Split
Again this is just a simple example and not a blueprint to be relied upon, each real world case should be considered carefully.
Say Matt is also a window cleaner trading below the VAT threshold. He starts a business offering car valeting services. The business trades from a fixed location and customers are required to bring their cars to the site, although for customers with luxury cars Matt offers a premium home service. Some of the high end customers also happen to be on his window cleaning round.
Looking at the facts Matt should feel comfortable that he is genuinely running two separate businesses. Although some customers overlap the businesses are genuinely carried on independently of each other.
Matt will want to ensure he creates a separate legal entity, in this case running one business as a LTD company, because activities carried on by a sole trader across multiple businesses under are considered one legal entity and the requirement to register for VAT would combine the income across all businesses in the same legal entity.
Clearly for those with multiple businesses interests VAT registration can become complex very quickly. A mistake could be very costly if mandatory registration is missed or potentially a commercially expensive mistake if registering when there was no obligation to do so. If you would like to discuss your VAT compliance and how WB Accountant can help you manage this please give us a call or send us a message.
