Usually, the mention of VAT makes people groan and mumble, probably because everyone has to pay it, whether it’s to fill up your car, ordering a pint, or even on a packet of Rolos as a treat for yourself (or maybe your kids if you’re feeling generous).
There are currently three rates of VAT:
- standard (20%);
- reduced (5%); and
- zero (unsurprisingly 0%).
Goods and services which attract these rates of VAT are known as taxable supplies.
Some goods and services may also be exempt or outside of the scope of VAT entirely. Neither of these types of supply attract VAT.
A UK business which sells taxable supplies must register for VAT if the value of taxable supplies:
- has exceeded the VAT registration threshold of £85,000 within the last rolling-12-month period; or
- is expected to exceed the threshold within the next 30 days alone.
A business may choose to register voluntarily or, if it makes wholly or mostly zero-rated supplies, may apply to HMRC for exemption from registration.
Usually, you would look at the taxable supplies of only a single legal entity (sole trader, partnership, limited company) to determine if you need to register for VAT. However, if you operate multiple businesses, you need to be mindful that HMRC may view that your business has been disaggregated.
Disaggregation – or artificial separation as it is also known – is the splitting of a business making taxable supplies which is usually controlled by the same person or people and, adding all the taxable supplies of those businesses together, the overall business would be liable to VAT registration. It doesn’t matter whether the business may not have intended to avoid VAT in this way; HMRC, backed by decisions in courts, need only prove that VAT has been avoided.
An example of this might be a husband and a wife operating a hairdressing and beauty salon from the same premises, whereby the wife owns the hairdressing element and the husband owns the beauty salon. Each are comfortably below the threshold at £50,000 and £40,000 taxable supplies each year. HMRC would likely challenge this, believing that the two should be treated as one business and, therefore, register them for VAT based on their combined turnover of £90,000.
If HMRC decides a business has been disaggregated and they take action to get the multiple parts of the business registered as a single entity, not only will the business have to account for VAT on its combined taxable supplies from the date it should have been registered, but it may also be liable to a Failure to Notify penalty of anything between 10% to 100% of the undeclared VAT. A rather expensive way to avoid VAT, whether intentionally or otherwise.
There are circumstances where disaggregation works, both for the business and for HMRC. One such example is a residential property developer and landlord. Property development activities are usually taxable; whereas residential rentals are usually exempt. If you have two companies – one for the development making taxable supplies and one for the rentals making exempt supplies – disaggregation may not apply and you would have the added bonus of not needing to consider Partial Exemption!
If you are thinking of splitting your business into different arms, you should always seek advice before going ahead as it may have far-reaching implications, not only for VAT, but for other taxes as well.