Q:
I am voluntarily vat registered – substantially below vat threshold.
I trade with general public and B2B alike. HMGov has just taken some of my income away by abolishing Home Information Packs – so income set to drop even further!
Remaining activity is energy assessment and energy services. I continually get outpriced when dealing with general public as most competitors are non vat.
I would like to split myself in two, 1/2 for domestic, 1/2 for B2B.
Could this be seen as avoidance?
Would I have to go ltd for one half?
A:
Hi
Well this whole subject of disaggregation of business activities is a real doozie and I have a lot of sympathy for small businesses such as yours trying to compete for business from domestic customers. I’m getting a lot of queries from accountants about the impact of the 20% VAT rate on small businesses and I know that a lot of small business owners are considering whether they can split their activities up to avoid VAT.
You know I don’t give specific advice here on the forum, hopefully my comments below will help you decide how to proceed.
There are lots of issues to consider so there is no simple answer. Every situation is different and you have to think through not just the VAT cost but the accounting, legal and practical costs and hassle of running an additional legal entity.
Taxable Persons
The first point about the disaggregation rules is that they only apply if the total value of the supplies made would require the person to be registered for VAT. In other words, they only apply if the total value of supplies made by the “taxable person” exceeds the VAT registration limit, which as you know is currently £70k.
The” taxable person” is a legal entity such as a sole proprietor, partnership, limited company etc and you have to take into account the income from all of the activities of the legal entity concerned for VAT purposes. And of course that’s why the disaggregation rules are concerned with “artificial” splitting of business activities between different entities to avoid VAT.
A hypothetical case
Let’s consider a situation similar to yours. Suppose the combined activity from all of my business activities as a sole proprietor is £50k, made up of £30k from business customers and £20k from domestic customers. If I’m registered for VAT as a sole proprietor, I’d have to account for VAT on all £50k income regardless of whether I can pass the VAT charge to all of my customers. The only way that could be avoided would be to set up a separate legal entity, for example a limited company, which doesn’t register for VAT, and transfer the domestic business into that company.
So yes, in principle it could work. But I’d have to keep on top of the VAT position in case the combined turnover reaches the registration limit. And this sort of arrangement is a bit like a red rag to a bull to HMRC – they look out for this sort of thing as a matter of course. It’s not just turnover from these 2 activities that they would look at, but any other related person/company/partnership etc and that’s when it can get messy.
For example, suppose they found that my husband/partner was carrying out separate business activities but he isn’t VAT registered. In that case they might argue that his income should be added to my combined income, both historically and going forward on the basis that we’ve been trading as a partnership from day one, regardless of the legal arrangements I’ve put in place to try and keep things separate.
That would always be my concern about the sort of business arrangements that you’re considering.
I can’t tell you what to do but I’d strongly recommend that you discuss your situation with your accountant as they understand your business and financial situation and will be able to help you to decide how to proceed. There are so many issues to consider, in particular whether it’s worth the cost and hassle of setting up and running separate legal entities in order to save maybe £2k- £3k a year in VAT . People come up with some inventive ideas but I rarely see anything that I think is worth the hassle of trying to run separate businesses for the relatively low VAT benefit.
Three final thoughts
- First, you should probably look at the Statement of Practice which HMRC have published about disaggregation which is here http://tinyurl.com/3yzw74h VAT Notice 700/12, Section 13. It’s a couple of pages long and has a fair bit of jargon, but you’ll get the gist of their approach to the subject and you’ll understand why it’s not possible to give a simple yes or no answer to your question.
- Second, are you using the VAT Flat Rate Scheme? If not, make sure you get your accountant to run the figures as this could give you a useful VAT saving without splitting things up to avoid VAT. Thousands of smaller businesses use this scheme to make VAT savings without splitting off activities to avoid VAT.
- Finally, if your total turnover is below the registration limit have you considered de-registering entirely? I know that sometimes it looks better doing business to business work if you’re registered but I wonder if you’d benefit more from getting more domestic work in the longer run if you just deregistered and kept your total income below the registration limit.
So please do talk to your accountant before you decide what to do. He’ll probably charge you for the advice but it could be money well spent if it avoids you getting into a mess in the future.
Marie