Q:
A friend has been running a hair/beauty salon for a couple of years as a sole trade and is VAT registered. They have now been advised to split it into two businesses, one sole trade and one ltd co to avoid VAT. Without going into detail about how the business(es) is(are) operated, is this not a very dangerous route to take? I think they believe that it will be okay for as long as they can get away with it with any Direction only kicking in from the date that it is issued. Surely, if it is too blatantly a case of simple avoidance, they will treat the businesses as VAT registered from the time that the new structure was put in place.
All comments are appreciated.
A:
Hi
I think you’re absolutely right. See my comments about the subject in my article here https://vatexchange.co.uk/general-vat/separating-businesses-to-avoid-vat/ for further information about the subject.
In the situation you describe, there is no doubt in my mind that HMRC would regard the situation as VAT avoidance and treat the businesses as a single entity which should have been registered for VAT from the date on which the original registration is cancelled. They regard such situations as avoidance and disagreggation is included in the VAT Notice 700/8: Disclosure of VAT Avoidance Schemes, see section 4.3.2 which specifically deals with disaggregation as avoidance.
From a practical point of view, your friend is correct that HMRC would have to be aware of the situation before issuing a direction or backdating a new registration. But they are good at identifying such businesses so you can’t assume that the business would get away with it indefinitely. And bear in mind that they already have details of the existing business and it wouldn’t be too difficult for HMRC to identify the fact that the business is disaggregating when it cancels its existing registration.
I can understand that small labour intensive businesses feel that they are at a disadvantage as far as VAT is concerned, having to pay 15% or 17.5% VAT from their relatively low income is a large cost for them. I’m also aware that many small businesses “get away with it” when it comes to avoiding VAT registration and I can understand why your friends want to try for themselves.
Make sure that they are taking advantage of any schemes to minimise their current VAT liability, in particular the Flat Rate Scheme, if they aren’t already using it.
Also bear in mind that while they might benefit from the cashflow benefit of not paying VAT in the meantime, the total cost and hassle of sorting it out as and when HMRC do become aware of their situation could be significantly more expensive.
Marie