Contents
- Coming Soon
Can I have 2 businesses to avoid VAT? This question is on the minds of many small business owners nearing the VAT threshold. While it may seem like a viable strategy, HMRC closely monitors such practices. This article will walk you through the rules on VAT, explain business splitting, discuss the risks, and explore alternative VAT management strategies.
Key Takeaways
- Businesses must register for VAT if their taxable turnover exceeds £90,000 in any 12-month period, leading to increased costs and administrative burdens.
- Business splitting can help owners remain under the VAT registration threshold, but it requires careful planning to prove operational independence to avoid penalties from HMRC.
- Alternative VAT management strategies, such as flat rate schemes and professional advice, can provide benefits without the risks associated with business splitting.
Understanding VAT and the Registration Threshold
VAT is a tax added to goods and services at the point of sale based on value. At the moment businesses must register for VAT if their taxable turnover is over £90,000 in any 12 month period. This can be a big moment for small businesses approaching this limit.
Crossing the VAT threshold has big implications. Businesses must start applying VAT to all sales. They can either absorb these costs or pass them on to customers which may increase prices and impact competitiveness. The additional admin and tax responsibilities that come with registering for VAT can be daunting for smaller businesses, many will look into ways to avoid registering.
By staying under the vat registration threshold businesses can save costs and paperwork and keep competitive pricing strategies – both good for profit margins. Care should be taken when considering both the legal and financial implications when using tactics to stay under this limit.
What Is Business Splitting?
Splitting a business involves dividing one business into multiple entities to keep each entity’s turnover below the VAT registration threshold. Business owners sometimes do this to avoid having to apply VAT and keep individual splits below the registration threshold.
To split a business without raising flags with HMRC, you must show there is no connection between these businesses in terms of economy, finance or organisation. A simple split with no real reasons could get you into serious trouble. Each separate operation must stand alone as a self contained unit.
Some business owners consider reorganising their operations into two entities to avoid registering every single one for VAT. This requires careful planning and precise execution to not only comply with the rules but also avoid fines.
Example of Business Splitting
Sheila had a hairdressing service and a wellness retreat. Her accountant told her to keep them separate. To keep them separate and below the VAT registration threshold, she was advised to set up her retreat business as a limited company. By doing that and running both businesses independently – with the retreat under a separate legal structure and her hairdressing practice run by herself as a sole trader – she avoids registering for VAT.
Another example was a couple running a pub and a B&B. They deliberately split their businesses to not meet or exceed the VAT registration threshold. Their strategy was to have different staff for each business, separate entrances for customers of each business and separate accounts – and they could keep their earnings at £75,000 per year from each activity without exceeding the vat threshold.
These examples show how important it is for people with multiple operations to keep their businesses separate through various means such as unique branding across businesses or using separate bank accounts like using separate marketing strategies can help demonstrate independent operation which is essential when trying to avoid compulsory VAT registration with multiple income generating activities.
Risks of Splitting Businesses to Avoid VAT Registration
Dividing a business just to avoid VAT registration can be dangerous. HMRC see this as tax avoidance and will come down hard if they think the split is artificial. Businesses that get caught out will be faced with retrospective VAT, penalties and other action.
HMRC will scrutinise any business splits to see if there are any financial or operational links between the new entities. If they find evidence of collaborative working, HMRC can merge the businesses for VAT purposes which could mean unexpected tax bills and fines.
By applying what’s called the “single entity rule”, HMRC can treat artificial split businesses as one business for VAT purposes. This means not only big bills for backdated taxes dating back potentially years but also more financial penalties. For compliance purposes under HMRC rules, each separate operation should be treated as a separate entity by treating intercompany transactions objectively (“at arm’s length”), having separate vat registrations and filing individual tax returns.
In summary, dividing your business just to avoid vat obligations introduces a lot of risk – often more than it’s worth given court unpredictability and possible severe penalties.
Genuine Business Separation Criteria
HMRC will look at several factors to determine business separation and these include separate bank accounts, different business names and different marketing strategies. Just having a different bank account isn’t enough. You need to show both financial and organisational separation.
Each entity must operate independently without overlap in management or staff, shared office space or joint advertising. Differentiating elements like individual business titles and exclusive marketing activities are key to this operational independence.
Any signs of a contrived division of businesses – using shared management teams or staff or operating from the same premises – will raise red flags. Businesses must show a real separation in their daily operations to avoid penalties from HMRC.
Ideally the separate businesses will also have a different mix of partners and owners.
VAT Registration Challenges
If you’re facing VAT registration issues you don’t have to split your business. You can go for schemes like flat rate or cash accounting which not only simplifies VAT administration but also improves cash flow. Voluntary registration for VAT can be beneficial. It allows you to reclaim VAT on qualifying expenses and may also boost your professional reputation.
By registering for VAT you can charge VAT on your sales and so improve cash flow and get savings by reclaiming the tax you’ve paid on business expenses. This will make your company appear larger and more trustworthy and can lead to more business.
Regular review of your VAT strategy is crucial due to changing thresholds and available schemes. Keeping up to date with the current rules of this consumption tax demands expert advice due to frequent changes in taxation laws.
Flat Rate VAT Schemes
The flat rate VAT scheme simplifies VAT by letting you pay a set percentage of your total sales which can be useful for small businesses with annual turnover not exceeding £150,000. This reduces administrative tasks and makes record keeping easier.
Newly registered for VAT get an added bonus of 1% discount on their flat rate in the first year, so initial expenses will be less. Note that this scheme is not available to businesses that receive VAT refunds regularly or those in a VAT group.
By using the flat rate VAT scheme you can improve cash flow as you’ll spend less time on complex calculations of tax obligations. So you’ll have more time to focus on your core business.
VAT Registration Options Benefits and Drawbacks
Choosing the right VAT scheme is key to a business’s financial health and can impact the amount of administrative work involved in financial support. Businesses can benefit from expert advice when choosing the VAT scheme that’s right for them, such as cash accounting which helps control cash flow by only paying VAT when customers pay.
The Flat Rate Scheme is for small businesses with an annual turnover of £150,000 or less. But becoming VAT registered brings additional responsibilities like meticulous record keeping and regular VAT returns.
Potential customers not vat registered might be put off by the extra VAT on prices and could affect market competitiveness. To maintain profitability like before vat registration will need a big increase in sales volume. You need to weigh up the pros and cons before deciding to vat register.
Writing to HMRC About Temporary Sales Increases
If your business experiences a sudden sales surge you need to contact HMRC and explain the situation, this may help you avoid vat registration. Transparency about the reason for the revenue increase will help address any vat registration concerns.
Proactively contacting HMRC about short-term sales increases shows transparency and commitment to the tax laws. It helps to avoid confusion and unwanted issues.
Professional Advice for VAT Management
Get a VAT specialist to advise you on vat management can make it easier to understand and comply with vat legislation. Experts in this field will give you the whole picture on how to register, comply and ultimately reduce your tax bill. They will help with accounts, tax planning and quarterly vat returns – all the essential bits to meet the regulations.
Having an accountant when splitting a business is crucial to avoid accusations of using this as a way to avoid tax. Accountants are skilled at navigating complex transactions like international sales and other multi faceted financial dealings. Regularly reviewing your vat approach with expert input will help you adapt to changes in the law and stay compliant.
Businesses with issues with split treatments or any other vat related matters should not hesitate to seek out specialist advice. It will save you from potential big problems that can arise without proper supervision.
Summary
VAT registration and finding the right approach for your business can be a minefield. Splitting a business to avoid VAT might seem like a good idea. But this road is fraught with danger – big fines and legal problems. Looking at other options like flat rate schemes or voluntary registration can bring benefits without the risks.
You need expert advice when dealing with VAT to manage it and stay compliant. Understanding the rules for a legitimate business split and reviewing your VAT strategy regularly will allow you to make informed decisions that will grow and sustain your business.
FAQs
What is the VAT threshold?
£90,000
Make sure you stay up to date with this limit.
What are the risks of splitting my business to avoid VAT registration?
Splitting your business to avoid vat registration has big risks, including backdated vat bills, fines and even legal action from HMRC if the split is deemed artificial.
Speak to a tax pro before you do.
Can I use the flat rate vat scheme for my business?
You can use the flat rate vat scheme if your business has a turnover of up to £150,000 which simplifies your vat by a mile.
How do I tell HMRC about temporary sales increases?
Telling HMRC about temporary sales increases can be managed by writing a letter explaining the situation, which helps with vat registration and shows transparency.
Why should I get professional advice for VAT management?
You should get professional advice for vat management to navigate the complexity, reduce your tax liability and be compliant, so you don’t get penalised.
