Vat and artificial Separation Concerns

[Caspar]

F urther to a question someone posed about 2nd business and VAT last week.

I wondered what your thoughts where on for example a sole trader with a computer repair business, who currently has a sole trader set up for corporate work contracts, and a partnership set up for private work, who now wants to set up 2 Ltd Companies. Corporate is teetering towards the Vat threshold and private is half way and growing.

If the corporate Ltd Co set up became Vat registered, and the private work Ltd Company did not become vat registered.

I would appreciate your opinion on how you feel this would be viewed for artificial separation for Vat purposes? As I was asked this very question yesterday.

Would they be better setting things up in a different way. As the corporate clients will have no problem paying VAT, but the private customers in the partnership business would go elsewhere if they were charged Vat.

(Also what are your thoughts on having a couple of part time repair staff on both payrolls but not all the staff crossing over).

Many Thanks
Caspar

 

[David Griffiths]

Separate entities dealing with registered and non-registered customers is one of the main indicators that HMRC look for on artifical separation. That makes it a high risk strategy from day 1

The sharing of equipment, premises and other items is also in that list.

The big risk comes in the administration. Normally, HMRC cannot backdate a directive about artificial separation - they simply direct that you register the combined business going forward. However, in most cases of this nature the admin is so muddled that HMRC say that there is in effect a partnership between the two allegedly separate entities. In that case the registration can be backdated to when the combined business exceeded the threshold, with interest and penalties.

This can be defended where the administration of the two entities is scrupulously accurate, and neither uses equipment or resources of the other without full payment being made. That includes things like tools, test equipment, stationery, telephone lines and staff. Most businesses are sloppy with this, with the result that they cannot defend their position.

It all depends on the facts of each case, but on the information given you are starting from a bad place and I'd rate the chances of success as nil to low if HMRC look at things.

 

[Caspar]

Thanks David, I will have a read of the link you have kindly inserted.

I was thinking that if the corporate trade incorporated and became vat registered with a sole director and shareholder, and the partnership private trade remained as such, (based on an earlier thread about a partnership being a separate entity.)

If say my client ensured no cross over of equipment or staff, could this give better protection from potential artificial separation? Or would two Ltd companies with no cross over give better separation?

Caspar