Splitting business in two

[Dave Teece]

Hi all

My wife and I run a Hairdressing business bought it 15 months ago. It is going well to a point that we will have to register for VAT.

The business provides Hairdressing and Beauty, can we split the business, the Limited company being Hairdressing and the Beauty business run as a sole trader by myself (I am a director of the Limited company) so that our turnover is reduced and we do not have to register for VAT.

I know that the VAT man might take a dim view of this but to me it seems legal - after all the Limited company is a totaly seperate entity to ourselves. The other business being Beauty and run on a completely seperate basis although under the same roof, paying rent for rooms to the limited company.

Our Accountant has reservations about this - just thought I would get a few more opinions - what I would like is a definitive answer or who I could ask for one.

Thanks for all advice.
Kind regards.

Dave

[Alpha]

I would have to support your accountant under the circumstances. The business, although in your eyes is seperate, it seems too closely connected to be able to argue that a limited company has been formed which is not with the express reason of avoiding vat registration.

Of course if you want an absolute definitive answer the people to ask would be HMRC :)

[Dave Teece]

Thanks for the reply Alpha. :D
Here is a bit more info.

The business until until just recently did not involve itself with Beauty.

A Beautician rented a room to run her Beauty business, she decided to leave to run her own shop. We put our daughter who is a Beautician on our payrole to continue to provide a service to our customers with a view of her going self employed - she does not want to do this now. So does the fact that the business did not origionally have a Beautician on the payrole act in our favour.

The Limited company was set up on the recomendation of our Accountant when we first bought the business and VAT then was not an issue.

Thanks for your help.

Dave

[Alpha]

Dave

The connections are
1) It is operated from the same premises
2) The sole trader (yourself) is also a director of the limited company.
3) Generically hairdressing and beauty salons are in the same line of business, can (and do) serve the same customers

Given this, what would you really think if you were a customs officer?

[Dave Teece]

Thanks for all your help Alpha.

Point taken :D

Take care.

Dave

[winton50]

Alpha,
I and I think Jayne have a similar setup to the one described.

The key points which I am sure I have also seen on the FSB site somewhere are seperation of the two entities.

My wife and I run two florists shops. I buy some of my flowers from my wife and I charge her for accounting work I do for her.

The keys for the vat Lady were that we were essentially seperate and that one company invoiced the other and the other actually paid.

There is no problem with the companies being in the same line of work or indeed called the same. Two companies are entitled to co-operate i.e. we share a delivery vehicle but we advertise seperately.

Wifeys business is VAT regd and I am not.

[Dave Teece]

Hi all

Last reply got me going.
If I remove myself as Director would this enable it to go ahead?
What difference does it make if some of our customers are common to both businesses?
Sorry to labour the point - stubborn nature (or mule headed :lol: )

Dave

[winton50]

It doesn't make any difference if your customers are common - especially if you are carrying on a different line of work.

As I said above me and al are in exactly the same line of work but we keep seperate accounts for each business and can prove payments for goods and services between the two.

I'm not even sure that you will have to remove yourself from the business. Remember that a Ltd co is a seperate legal entity and as such I suspect that if you had three businesses one yours one the wife's and one a ltd co with at least one other director you would be OK.

but as stated above check it out with HMRC they are helpful and not the ogres we tend to think them to be.

I'll try and find that link - I think there's also something on HMRC website too.

[Alpha]

The key points which I am sure I have also seen on the FSB site somewhere are seperation of the two entities.

This is indeed the key point.

Now look carefully at the business(es) described by Dave and spot the differences between your setup and his. :)

[winton50]

Sorry Dave the link is in a membership section of the FSB website but the salient parts are below;

Business Splitting
As mentioned above, it is the person that is registerable for VAT, not the business. Therefore, if you are the sole owner of two or more businesses, whether or not they are similar, they are all linked together for VAT purposes.

It is possible to split businesses into different legal entities i.e. partnerships and limited companies, but extreme care should be taken to ensure that the businesses are separate, both in fact and in law. You must:

Have separate books and records.

Have separate bank accounts.

Have separate notification to the Inland Revenue.

Have separate annual accounts.

Have separate insurances.

Have any properties in separate names.

Have separate Partnership Agreements.

Have separate advertising.

Have separate telephone numbers.
Have proper and commercial paperwork for any inter-business dealings, preferably at arms length.
If Revenue & Customs can prove that the business splitting is a sham, then you could be in a VAT arrears position. See VAT leaflet 700/1/02 paragraph 14 for further information.

[winton50]

Alpha,

I see no reason why Dave cannot open a second business. If the beautician has left there is no reason why he couldn't resign as a director, open up a seperate bank account and trade in his own right from the same or any other address.

In the same way that the beautician was employed by the company, decided that life was better with us self employed, left and opened up in her own right so could Dave.

Similarly a business case could quite clearly be made for splitting the two halves of a business. Maybe Dave has a plan to resign from the business, build up the beautician side and then go and get himself bigger premises when the business can support it.
Both the above cases are perfectly reasonable in the real world and not necessarily an attempt to evade duty.

[Dave Teece]

Thanks Stuart

I am really worried about the implications of going VAT registered.

We would have to take on more staff.

If we take on more staff we will have to set up a stake holder pension - what expense?

Accountant fees will increase - they will do the VAT accounts.

I can see a big financial hole looming!!!

What if we just bump around the VAT level ie in and out how does this work?

My wife will end up working for nothing - I am OK I have a full time job
but it is distressing for her.

But hey thats business!!!!!!
:wink:
Dave

[winton50]

Dave,
I reckon you are suffering from Daily Mail disease!

Things aren't that bad. VAT Accounting can be really easy - honestly even for non accountants. There are loads of schemes such as the flat rate scheme which may be suitable for you - again talk to the VAT office. You can buy computer programs that do it all for you or even a simple accounts book - save yourself some money!

I don't undertand the link between going VAT regd and taking on more staff?

You can't bump in and out I'm afraid. If you're in you're in. If you want to come out you have to deregister. Far better if things are going too well (lucky you) to close an extra afternoon a week and take less money.

you need 5 staff (I think) and they have to request you to open a stakeholder scheme and you only have to administer the payments in the same way as you take tax out of their wages and pay it to the HMRC then you would take say £20 a week out of their wages and pay it to a pensions company - not a massive challenge!

What was the reason your accountant suggested you go Ltd for such a small turnover?

Working for nothing? I know the feeling!

[Alpha]

Stuart

That was the point in the first place

Where did I say he could not resign as a director and start up a seperate sole trader business?????

On the basis on information given in the current set -up my advice still applies.

Now if he wants to change the scenario then the advice is different.

[winton50]

You haven't Alpha,
But by the same token I am simply saying that that is a belt and braces approach. I don't think that he would HAVE to resign as a director just use the rules above to prove that there are two entities at work.

[Alpha]

Dave

Firstly as Stuart says it is not neccesarily difficult to do the vat returns but obviously if you are not confident about it then get someone else to do it.

I should point out that stuart is an accountant by training so he probably doesnt see the problems that some people have in doing accounts/payroll

Look at the costs

If you have 5 or more staff then you have to have a pension scheme setup. You do not have to contribute to that scheme, neither does your employees have to join the scheme. If neither happens the additional cost is zero.

If you believe that in any 12 month period that your turnover is likely to (semi) permanently exceed the current registration threshold of £60000 then you will have to register for vat. If it can be shown that there has been a minor blip then you do not have to register, however constantly moving just above/just below will require registration.

as

:D :D

[Alpha]

Stuart

It is not 'belt and braces'

If Dave goes ahead with the setup as is

He is a director and shareholder of a limited company AND he sets up running a sole trader business on the SAME premises where neither are vat registered but if the turnover is added together they would be over the threshold then I would give a pretty good chance that the outcome would be that HMRC would declare the business as being artificially seperated.

Thats my view

The most important view would be that of HMRC and if your accountant does not feel comfortable with the situation he is hardly likely to be able to put up a strong argument should it be required.

[winton50]

Alan,

Why are you conflating the issue of premises? It has nothing to do with VAT registration.

Dave is a shareholder and director of a Ltd co. Yes. a different entity entirely. The problem Dave has is that he will not be running the new company as I understand it his wife will be running both day to day. This is a bigger issue than the ownership.

And Dave - from a business point of view get yourself along to your local college where I bet they do short courses in bookkeeping. It may save you money but even if you decide to let your accountant do the simple donkeywork you will understand what he presents to you at the end of the day.

HMRC do free payroll courses. They are very very good and they are FREE!

oh yeah and If your accountant feels uncomfortable about going into bat for you - get another accountant!

[Dave Teece]

I seem to have started an interesting debate which could probably go "ad infinitum" - have i spelt that right?? :D

The company never did employ a Beautician, the beautician who was on our premises was self employed and rented space from us. It is only the past 2 months that we have had our own.

The trouble with hairdressing is that there is very little to reclaim back ie low costs high labour so we would be working just to pay the VAT man, we had a word of warning from the Person who we bought the business from - "whatever you do do, do not get into a position where you have to register for VAT" the previous owner did not put everything through the till she showed me her second set of books!!!!

I reasoned that I would have to take on more staff to increase our turnover and profit to make it all worth while.

Dave

[Alpha]

Stuart

Why are you conflating the issue of premises? It has nothing to do with VAT registration.


I am not continually going on about premises. The whole point is that HMRC will look at the whole nature of the business and decide whether it has been artificially seperated which with due consideration of all the information given (including the fact they are on the same premises, both sides of the business are currently running there, they are about to go over the vat registration threshold and therefore split the business into a limited company and a sole trader but the management and the running of both businesses will be unchanged) then my opinion is that they will insist that there is an artificial seperation of the business to avoid vat.

Two years ago I did win an argument against C & E for a client of mine who funnily enough had a hairdressers that was a limited company, his wife ran a hairdressers as a sole trader (she was also a director of the limited company) and the inspector did try to argue that there was an artificial seperation to avoid vat. (This situation is similar to your (Stuarts) current situation.

Nothing is black and white and very rarely are two situations the same (even as far as two different inspectors will have completely different views on the same subject which I have had with a nursing agency client)

In Stuarts case one business is vat registered anyway so that is another potential argument that they are not trying (wholly) to avoid charging vat.

Pragmatically

You can do what Stuart suggests (inc finding a new accountant).

This argument will only come up if you get investigated
(which may become increasingly more likely as the revenue and customs become more integrated) but some of the points which would make me hesitant about winning the argument eg you have split the businesses because they were coming up to the threshold amy become buried as they are not likely to go back over more than two years of your records.

The revenue themselves choose around 10000 cases to investigate at random(outside those that are statistically flagged up) they will eventually be looking at these case on behalf of both departments.

So I suppose

Was that 5 bullets or 6, tell you the truth I did not keep count1 Do you feel lucky punk :D

[Dave Teece]

May be I should change my Accountants - I assumed they where good because they where a chartered group.

Having talked with them all they seem to be saying is register for VAT and put your prices up! They do not seem to be coming up with the ideas
thing is I have used them for about fifteen years now - how difficult is it to change?

Hey Ho

Dave

[Alpha]

Sorry Dave but nothing is absolutely black and white.

May be I should change my Accountants - I assumed they where good because they where a chartered group.

Bad assumption there are some very good accountants out there who are not even professionally qualified (Qualified by experience).

Many of the chartered institute (most professionally qualified accountants have been chartered for over 10 years) have always used this fallacy to promote their own businesses.

one of my business propositions came about because so many people I spoke to complained about their accountants not giving them the right proactive advice (they often did their accounts and tax, charged them and told them to come back next year), however like many other things such as banks, mortgages etc. Most people will stay with the ones they have been irrespective.

It is usually very easy to change accountants (the new accountant will do most things for you).

If you need the face to face contact then perhaps Darren at 1stAccountancy on these forums may be close enough for you to have a talk to( I believe he is in Yorkshire but not sure where).

Also in this day and age with telephone, e mail etc there is no problem in having an accountant who lives in London for example.

i think you will find that most accountants who frequent this board will be able to offer you a very good service in this way and (probably) cheaper.

It is always worth investigating if you feel that way.

[Alpha]

Also Dave dont forget to look at your Private Messages (for things which people do not want aired in public)

see blue bar across the top of the forums :D

[winton50]

Dave,

I meant no criticism of your current accountants by asking why they suggested you go Ltd - there are many good reasons, just interested that's all.
Changing accountants is easy theoretically because we are all supposed to act ethically and have the client's wellbeing at heart. Practically it may be a little more difficult as you have to find one that you get on with and get to know each other etc. But can I suggest you go along and have a heart to heart with your current guys? See if they are able to offer anything else.

Alan is spot on when he says that qualifications are no guide like any profession there are good and bad and like lawyers there are always a dozen different opinions!

I agree with your analysis re your VAT position it looks on the face of it that you would be in the same position as many businesses when the come to this hurdle.


Alan,

We put our daughter who is a Beautician on our payrole to continue to provide a service
My wife will end up working for nothing - I am OK I have a full time job
but it is distressing for her.

I have obviously assumed that Dave, having a full time job will indeed continue with this and his wife will take all the key decisions on a day to day basis given that his daughter does not want to continue.

As The Beauty side has only been going for a couple of months and it was run as a seperate business by a totally unconnected party previously I think there is definately an argument to be had.

A written enquiry to HMRC along the lines of 'I've just taken over this business...' may elicit the required response.

Incidentally I never suggested you were 'continually going on' I suggested that you are conflating premises with entities.

Whilst I only have the experience of my own business, conversations with our own inspector and her supervisor plus the local VAT office and the FSB legal helpline and the published advice on their website and working for a national company during the splitting of one company into three different VAT groups to go on I would point out that I have said to Dave that he should make sure with the VAT office as they are very helpful.

Also I don't have anything to sell to Dave, my advice is purely as a fellow business owner who is in a similar position and my advice should be viewed as such.

Oh yeah an if ya wanna trade quotes
http://www.whysanity.net/monos/goodfella2.html

:D [/url][/quote]

[Dave Teece]

Many thanks to all and especially Alpha and Winton50 you have been very helpful.
Best wishes.

Dave

[fastfences]

Thanks to Dave, Winton and Alpha for this extremely informative and appropriate thread.

I am in exactly the same pos. as Dave. I have been considering 'splitting' the company by forming a seperate entity (sole trader) for fence repairs and maintain the Ltd company for construction and new jobs. From all the above info. it's patently clear that I'd be a candidate for avaidence questioning!

Thanks, all,cheers, Nigel