VAT registration and Artificial Separation

Fareham Grecian · Feb 24, 2009

Hi all - new poster here so be gentle!!

I am a 50% shareholder and director in a limited company, though I effectively run it solo. The other director/owner now wishes to set up and run a sort of sister company - same trading name, activities and corporate image but operating totally separately with different location, customer base, staff etc. I would intend to be a 50% shareholder and director. Each business would operate below the VAT threshold. The separation of businesses is in no way artificial, i.e. to avoid VAT registration, but do you think HMRC could claim that it was, what with the common ownership? If you think it sounds dodgy, what is the difference in principle between our setup and a franchise?

Any help/opinions gratefully received.

davebrown · Feb 25, 2009

Have a look at the detail in VAT Notice 700/1, which includes the sort of things that HMRC are concerned about:

the separation is artificial;
the separation results in an avoidance of VAT;
the parties involved are closely bound by financial, economic and organisational links; and
the other legal requirements are satisfied.

Consider a national franchise, and then consider your set-up. HMRC could take the view that there are financial, economic and organisation libnks in your set-up, which would not necessarily be found in a franchise situation.

However, unless you're careless in separating the businesses, any action that HMRC take can only be forward looking, under a Direction - which can always be appealed.

Dave

www.davebrownvat.com

Fareham Grecian · Feb 25, 2009

Thanks Dave. I had read the HMRC guidance, and it seems to me that there is no stronger a link between our two businesses than in a franchise situation - the franchisor benefits financially and gives organisational help in the same way that I think myself and my colleague would. The question of course is whether HMRC would share that view, and I understand they won't answer questions until you've actually set up and they investigate your particular case!

Zeno · Feb 25, 2009

I am afraid I disagree. The owners and directors of both businesses are the same. I assume they will also use the same suppliers?

By the logic proposed so far, every branch of M & S could be a separate business.

davebrown · Feb 25, 2009

Unfortunately, as with many parts of VAT legislation, the answer/result will be dependent on subjective views being taken, either by a visiting officer, or by someone in the National Advice Service. There is no black and white answer and you really don't really have many choices:

Run it past HMRC now (flag it up to them, invite them to issue a Direction!)

Plough on regardless, and cope with any fall-out when it happens.

Change the directors, such that you don't have the same directors in each company. Creative thinking would have to come into it, such that you give yourself an acceptable commercial situation. (And then plough on with it.)

Fareham Grecian · Feb 25, 2009

Zeno said:
I am afraid I disagree. The owners and directors of both businesses are the same. I assume they will also use the same suppliers?

By the logic proposed so far, every branch of M & S could be a separate business.

Well yes, I agree. Presumably M&S could be run as a franchise, like lots of high street shops.

The question I suppose is would HMRC give much weight to the 'common ownership' issue compared to the other factors they consider...

david@purpleaccounts · Feb 25, 2009

A franchise is most likely to be operated under another limited company name, trading as xxxxxxx. There are two key elements which come into question; 1. nature of the trade, and 2. beneficial ownership. If the trade is similar and the both companies fall under common ownership, l suspect that the revenue will have a case to aggregate the two companies in determining whether or not you should be vat registered.

Zeno · Feb 25, 2009

I agree with Dave B that it is a subjective issue. Opinions are like arseholes so you will not get a definite answer.

I believe that the common ownership and control will be an decisive factor here with both companies doing exactly the same thing with the only difference being it is in a different location.

In my experience, any two companies owned and run by the same people will not stay separate for long before the divisions start to blur.

What could happen is that one company is short on cash while is not so the cash rich company loans money to the other. After a while, all that happens is the cash rich company pays the suppliers for the other directly.

Also consider trade discounts. One account for both companies would likely yield higher discounts and betters terms than two separate ones.

The same goes for banking, credit facilities.

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