Company splitting - VAT Implications

[fastfences]

Hi all,

Many may have read of my intent to franchise.

One of my goals for 2006, is to set up 'model' franchise, operating totally independant of my present company, Fast Fences Ltd.

As preliminary advice, if I have a second company formed, say, Fast Fences(Birmingham) Ltd (by Quick Formations, of course) which would operate, advertise and purchase everything in its own right, could it be viewed that I am trying to avoid VAT on the initial company?

In setting up the 'franchise' model, can Fast Fences Ltd contract its staff to Fast Fences(Birmingham) Ltd, for a period of time until new employees can be sourced?

I would be pleased to receive any other pertinent comments.

Cheers, Nigel

[Joyous]

Hi Nigel

I'd say you were skating on thin ice there. HMRC are very aggressive when it comes to dealing with what they call "disaggregation". This is basically when a person splits his business so that turnover in each of them stays under the VAT registration threshold.

Customs will basically look at the separate businesses and if they decide that in fact they should be treated as a single entity they'll use their powers to direct that they be treated as one. If you've failed to register you're then looking at penalties and interest etc.

Regards

Joy

[fastfences]

Hi Joy,
Ta for taking the time to respond to this.

I fully acknowledge your sentiments. The distinction here is that the 'second' business is being 'bred' for sale, and will naturally be supporting itself, save for initial 'borrowing' of staff. Do you feel that would make any difference?

Obviously I will be discussing this with my accountant; I was hoping to get a few comments that we could use to 'thrash around.' I guess the 'sensitivity' of anything VAT is beyond mosts level of expertise.

Thanks again
Nigel

[Joyous]

Hmm, interesting one that. A different accountant might give you a different view but this is what I think.

Until you sell off this separate arm of your business it is still part of your business. Also the fact that the two companies will have staff in common doesn't help. HMRC are not going to suspend the need to register because you intend to sell, especially as intent to do something doesn't always result in it actually being done.

If you could demonstrate to HMRC that breaking the threshold was only a temporary blip then there could be a chance you wouldn't need to register but it doesn't sound like that's the case here.

Anyway talk it over with your accountant. He might be a bit more creative than me.

Regards

Joy

[fastfences]

Cheers again for that!
N

[winton50]

Nigel,
I reckon you'll find that the two companies share too much in common for them to be seprate entities and so will have to share a vat registration until you sell.

If you set up the sale company just before sale with the new owner as the director then you would be better off as long as you have no control over the new company.

Have you tried the british franchise association? I think they give allsorts of advice like this.