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Hi Marie
I’m sure you have come across this position many times. Although I have seen situations in the past where it is obvious that there is an artifical separation, I wonder if the follwing would be classed as such:
Wife has been a sole trader for the past year trading as a nail technician working from home. Recently her and her husband have seen an opportunity to start a business supplying wholesale nail supplies. They have set up a limited company of which they are both directors and have leased premises to trade from. Trading will be starting this month. At the present time the sole trading is below the VAT threshold and likewise the wholesale business.
The wife would like to rent part of the leased premises to base her sole trader business.The question has been raised about voluntary VAT registration for the limited company as this will be dealing mainly with VAT registered suppliers although customers may or may not be registered but will be use of paying VAT on supplies.
Obviously at the present time the sole trading business is more competitive as it doesn’t have to charge VAT.
The businesses have separate bookkeeping records and bank accounts. Do you think the limited company could be registered without having to include the sole trading business?
For information: the husband is registered for VAT for a sole trading business which has now ceased – the VAT registration is currently being cancelled. He also intends to resign his directorship in the next month – not quite sure way yet. I’m not sure yet if he will retain his share holding.
Will be interested in your comments. Hope there is sufficient information for a general answer.
Regards
Denlian
Hi Denlian
I assume that your main concern is whether or not the wife will end up having to pay VAT on her income from her technician business.
Just to clarify a few points:
- You say that the husband is currently VAT registered as a sole proprietor – I assume that this is with a completely separate business not related to the nail product wholesale business or the wife’s nail technician business.
- You also say that the husband is to resign as director of the limited company, which has been set up for the purposes of the wholesale business.
- If that’s correct, then you have a situation where the wife is the sole owner of the company which will buy and sell products that she uses in her sole business.
I think that there is a very simple way of looking at this. Remember that teh concept of disaggregation is to deal with those situations when one person/group of “connected” persons has more than one business activity, whose total turnover exceeds the VAT registration limit, but have separated the businesses so that the turnover from one or more parts is below the registration limit.
The law says that in these situations, HMRC can direct that there is a single entity or business and require the owner(s) to account for VAT under a single VAT registration number This applies whether or not avoiding paying VAT on income is the main reason or simply a side-effect of separating the businesses.
The circumstances can apply even when the separate owners ensure that all transactions between themselves are done at arm’s length and at open market value, with proper paperwork and invoicing whenever required.
The situation you describe seems to be a classic situation where they would apply the disagreggation rule. First of all, the business activities are linked; secondly the owner of both businesses is the same person. And I think that this would apply whether or not the company is registered but the sole proprietor is not registered: or that both company/sole proprietor are not registered.
There might be a somewhat better chance if the company had more or different owners – perhaps different family members. But even in this case, you’d still have to be very careful that all of the transactions are at arm’s length, with proper paperwork etc.
The disagreggation rules are really difficult to get round. I hear a lot of stories on the one hand from people who’ve had a dreadful time dealing with HMRC and on the other hand from those who seem to get away with not being registered in classic situations. I have such a lot of sympathy for small, labour intensive business owners because as advisors, we know how hard such people work and how difficult it is to deal with having to charge an additional 20% to retail customers.
There are a few cases that have gone to the Tribunal and won against HMRC, though they tend to be very unique circumstances. You’ll appreciate that I won’t give any direct advice or recommendation on specific circumstances here in the forum, but I would say that HMRC would probably challenge the situation you describe.
Marie
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