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My husband are both active director/shareholders of a small online retail limited company and are VAT registered. My husband has an idea for a new business, selling a completely different product . In the new Limited Company he would be the sole active director but I would be the company secretary. Although the new product is completely unrelated to those sold in our existing company, has a different supplier and would also have a different set of customers we would need to use the same premises for both economic and “physical” purposes. Does this mean that the Turnover of the new company would be aggregated with that of the existing company for VAT or would it be treated as as a seperate VAT entity? I have had conflicting advice and although I have read the information on the HMRC site, I still have no clear picture! All advice will be much appreciated! Thanks!
Hi Sharon1962
It’s not clear from your query whether the turnover of the new co will be below the VAT registration limits.
As long as it is a separate legal entity, newco can have its own VAT registration, or alternatively you may prefer to have a VAT group registration to simplify administration so that there is only one VAT return. See http://www.hmrc.gov.uk/vat/start/register/groups.htm for information on this subject.
However I assume that your preference would be to keep newco unregistered for VAT and that your concern is whether or not HMRC would regard this as “disaggregation” of the business activities.
You’ve obviously already read up on this subject so I won’t spend any time going into the basic issues involved but in your case, it is important to understand that there are two separate issues when it comes to disaggregation as follows:
• The first is whether both business activities are being carried out by separate entities or one single entity. In this case, HMRC can treat all of the activities as being carried out by a single entity, in your case this would be the existing limited company and require this company to account for VAT on all supplies made from both business activities.
• The second is that there is a genuine separate legal entity, but the effect of having a separate legal entity means that one or both of them is not required to register for VAT because it’s turnover is below the VAT registration limits. It is particularly important to be aware that HMRC don’t have to demonstrate that the intention of separating the business activities is to avoid VAT; it’s enough that one of the effects of separating the business activities is to avoid VAT registration. So in principle, genuine arrangements can be caught by the legislation just as well as deliberate attempts to avoid VAT registration.
I’m not surprised that you had conflicting advice about this issue as every accountant or tax adviser will doubtless have their own experiences with clients and this is one of the most grey areas of VAT practice that most of us will have dealt with. If you look at the VAT cases involved – i.e. those situations where businesses have appealed to the VAT tribunal against HMRC’s decision over the years – there are some judgements that seemed to follow HMRC viewpoint and others that go against HMRC. Unfortunately, there’s no one defining thread so it’s very difficult to give any firm recommendation on the issue.
In your case, while there may be a good commercial argument for having 2 separate companies, I think it would be difficult to persuade HMRC that there is a separate business activity simply due to the practical arrangements of having the same premises and directors. For example, I assume that each of you would interchange your activities during the day from one company to the other so it would be difficult to argue that either one of you is fully occupied on either companies activities at any one time.
As you know, anything I put on these forums is not formal advice, but I would have to say that if you are coming to me as a client and ask if a formal opinion, I would probably say that the likelihood that HMRC would regard your situation is falling within those businesses which are artificially separated for VAT purposes is somewhere around 80%. If you think about it from a practical point of view, it’s not that unusual to go into a retail shop and see a wide range of different goods and services available and will attract different customers. And I think that’s really what’s happening in your case. The fact that one activity is online and the other may not be online also doesn’t make that big of a difference, as pretty well every retailer in the UK has an online presence nowadays.
It may well be the case that if I looked at your situation in more detail, I would find other information to support your position. However whenever I’m dealing with small businesses, I always stress the fact that if you choose to keep things separate and thus avoid paying VAT on certain business activities, you have to balance the potential VAT saving up with the long-term hassle that would arise should HMRC carry out an inspection of the existing VAT registered business at some point in the future. Not only would you have to do pay the outstanding VAT, but you may also be faced with interest and penalties, plus the potential professional costs of sorting it out, not to mention your own time and the worry involved. I’ve seen many situations over the years where small business owners have taken the decision to register for VAT in these circumstances simply because they know how much hassle would be involved down the road once they’ve looked at the broader picture. You also have to bear in mind that any savings on VAT would simply be additional profit/income that may be liable for corporation tax, so once you’ve done the sums it may be that there’s not much of a saving that you’d anticipated.
The other thing is to ensure that your businesses, both existing and the potential new business – take advantage of the VAT flat rate scheme so as to minimise amount of VAT that you have to pay to HMRC. My own personal view is that small businesses should be entitled to use the reduced rate of VAT at 5% or some other reduced rate, unfortunately I don’t think that the Chancellor is likely to agree to this at any time in the foreseeable future!
Finally, while I suspect that some of the “advice” you’ve received is that there wouldn’t be any problem in NOT paying VAT on Newco’s income, I suspect you’d find that any professional adviser when faced with a similar situation for their own business, would play things very safe and simply accept that they should pay the VAT rather than face the potential cost and hassle at a later date.
At the end of the day, the onlyway you can be certain would be to write to HMRC with full facts and ask them to confirm whether or not they would regard this as disaggregation for VAT purpose. Certainly if I was in your position that’s what I would do. It is possible that they’d agree with you, but the only way you’re going to find out is by asking and in that case you have to be prepared for them to disagree with you.
I know I haven’t given you any definitive answer here, but I hope what I said at least helps you decide how to proceed.
Marie
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