If you are a trader who is close to or above the VAT registration threshold (which is currently £85,000 on a rolling 12 month basis), you might be tempted to split your trade into two smaller businesses, or even been told by friends “in the know” to do this to avoid charging VAT to your customers. This might seem like a clever way to save money and stay competitive, but is it legal? And what are the risks and consequences of doing so? In this blog post, we will explain what HMRC’s rules are on splitting a trade and what you need to consider before making any decisions.
What is splitting a trade?
Splitting a trade, also known as disaggregation, is when you divide your trade into different parts and operate them under separate legal entities, such as sole traders, partnerships, or limited companies. The aim of doing this is to keep each part of your trade below the VAT registration threshold. This way, you can avoid registering for VAT and charging VAT to your customers, which might give you an advantage over your competitors who are VAT-registered.
For example, if you run a hair salon and a beauty salon under the same legal entity, you might decide to split them into two separate businesses, one for hair and one for beauty. You might also decide to split your trade geographically, such as having one business for Peterborough and another for Huntingdon. Or you might decide to split your trade by customer type, such as having one business for individuals and another for businesses.
What are HMRC’s rules?
HMRC does not allow splitting a trade for the sole purpose of avoiding VAT. They consider this to be tax avoidance and will challenge any arrangements that they deem to be artificial and abusive. HMRC has the power to treat the separate parts of your trade as a single entity and register it for VAT, as well as impose penalties and interest charges for any unpaid VAT.
HMRC will look at the facts and circumstances of each case to determine whether splitting a trade has taken place and whether it was done to avoid VAT. They will consider factors such as:
• The nature and extent of the links between the separate parts of your trade, such as financial, organisational, and economic links
• The degree of independence and autonomy of each part of your trade, such as separate bank accounts, records, invoices, suppliers, and customers
• The commercial rationale and motive behind splitting your trade, such as genuine business reasons or personal preferences
HMRC has published some guidance and examples on how they approach splitting a trade and VAT avoidance on their website https://www.gov.uk/government/publications/vat-supply-splitting-tax-avoidance-schemes-spotlight-38/vat-supply-splitting-tax-avoidance-schemes-spotlight-38
What are the risks if I decide to go ahead?
If you decide to split your trade to avoid VAT, you are taking a risk and exposing yourself to potential consequences, such as:
• HMRC investigations and enquiries, which can be time-consuming, stressful, and costly
• Backdated VAT assessments, penalties, and interest charges, which can be substantial and affect your cash flow and profitability
• Damage to your reputation and credibility, which can affect your relationship with your customers, suppliers, and other stakeholders
• Legal action and prosecution, which can result in criminal convictions and sanctions
What else can I do?
Before you decide to split your trade, you should carefully weigh the pros and cons and seek professional advice from LeeP Accountants on the legitimacy and pitfalls of doing so. You should also consider other ways to reduce your VAT liability, such as:
• Claiming any expenses or deductions that are relevant to your trade, such as travel, stationery, or equipment
• Making use of any allowances or reliefs that can reduce your taxable turnover or VAT rate, such as the flat rate scheme, the cash accounting scheme, or the annual accounting scheme
• Planning ahead and saving for your VAT bill, by setting aside some money each month or quarter to pay it on time
We hope this blog post has helped you understand whether you can split your trade into two smaller businesses to avoid registering for VAT and what you need to consider before doing so. If you need more help or advice, you can contact LeeP Accountants on 01733 699033