The Do’s and Dont’s of Splitting Your Business to Avoid VAT Registration

Hi, I’m Nishi Patel from Northants Accounting, and in today’s video I just wanted to talk about splitting your business to avoid VAT registration. So a lot of businesses these days where they’re selling business to consumer, so essentially to people who aren’t VAT registered, they often dread reaching the VAT threshold, because what it means is they would essentially have to add to their prices, or instead of adding to their prices, they’ll have to take the VAT hit themselves and pay it on behalf of their clients.

What often happens is where you’ve got certain businesses that are being run a particular kind of way, business owners are eager to kind of split those businesses into two separate businesses, so the VAT threshold only applies to each individual business separately, and then it’s one way for them to increase their turnover without actually having to register for VAT.

Typically, this could be if you run the kind of business where you’ve got doing some kind of maintenance, but then you also have a side element to it where you’re selling certain products or certain materials. Then this could work quite well, but there’s a few things that you’d have to be really careful of when you’re doing this.

So one of the biggest challenges about splitting a business for VAT registration purposes is because if HMRC come along later on and then they look at the two businesses and they think, well, this was an artificial split purely to save VAT, then what they could do is they could actually order the businesses to be recombined, but they can backdate it to the point where they feel that you should’ve had to register VAT based on your turnover. So, if that happens, this can be really tricky for a business because they could end up with a tax bill that’s easily in the region of 10, 20, 30K, depending on how long they were actually doing it for before they were caught.

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When someone is actually splitting a business for VAT purposes, there’s a few things they’ve got to keep in mind to do it semi-safely. One of them is if you split a business for VAT purposes, you want to have a separate partnership or a separate mix of partners.

So, if you’re running one business yourself, you probably don’t want to run the other business just by yourself. You may want to bring a partner into that, or even better, have a limited company and have two different shareholders on it so that can give some sort of protection in terms of HMRC coming along and combining two businesses as one for VAT.

Another area to really focus on if you are going to split businesses is just to keep them completely separate, so different sets of accounts, different sets of marketing, different names. Run them as two completely separate entities. Where one business does work for another, make sure it’s invoiced at a sensible market rate, not just mates’ rates.

That’s one way to give a bit more protection. If you do all that stuff, then HMRC down the line might come along and say, well, these businesses need to be combined for VAT, but at the very least, they can’t backdate it, so it will give you a bit more security.

Sometimes when you’re coming up to that VAT registration point, you might just say it’s not worth the hassle separating these two businesses. Maybe I’m better off just registering for VAT, finding it there’s a better VAT scheme I could go onto to try and save me a bit of money on that VAT bill, and then just focusing on growing that business.

Splitting a business for VAT purposes isn’t always the best way to go, and an alternative could just be to focus on that one business and get the turnover to a point where it makes sense to be VAT registered. Or it could be a case of control the turnover, work less, and actually stay below the threshold.

So, there are a few options when your business is coming up to VAT registration. If you want to find out a bit more about this or anything else relating to VAT, then please give me a call.

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