Can I Split My Business for VAT Purposes? A Comprehensive Guide

Introduction

One of the most frequently asked questions from business owners is whether they can split their business to avoid VAT registration. The short answer is no—if done artificially, it is considered VAT evasion and is illegal. However, there are legitimate cases where separate businesses may not need to be combined for VAT purposes. This guide will explain the rules, potential risks, and alternative VAT-saving strategies.

VAT Registration Threshold

If your business turnover exceeds £90,000 (as of 2024) in a rolling 12-month period, you are required to register for VAT. Some business owners consider splitting their business into two entities, each below the threshold, to avoid registration. However, HMRC has strict anti-fragmentation rules to prevent this kind of avoidance.

The Three VAT Tests for Business Separation

HMRC assesses whether two businesses should be treated as one for VAT purposes using the following three tests:

1. Financial, Economic, and Organizational Links

• Do both businesses share resources, bank accounts, or finances?
• Are there common employees or management between the businesses?
• Do the businesses operate from the same premises?

2. Customer and Supplier Dependency

• Do both businesses serve the same customer base?
• Are they heavily reliant on the same suppliers?
• Would one business struggle to operate independently of the other?

3. Artificial Separation Indicators

• Are the businesses providing essentially the same services/products?
• Is there evidence that they were set up purely to avoid VAT?
• Would combining the two businesses take turnover above the VAT threshold?

If HMRC determines that the businesses are artificially separated, they can force retrospective VAT registration and apply penalties.

When Can a Business Be Legitimately Separate?

There are instances where businesses can remain separate for VAT purposes:

• They operate in entirely different industries (e.g., an accounting firm and a carpentry business).
• They have separate management, employees, and finances.
• They do not share customers or suppliers.
• They have clear independent branding and operations.

Legal VAT Reduction Strategies

If you’re looking to reduce your VAT liability legally, consider:

• Flat Rate Scheme: A simplified VAT scheme where you pay a fixed percentage of turnover.
• Cash Accounting Scheme: You pay VAT only when you receive payments, improving cash flow.
• VAT Exempt or Zero-Rated Supplies: Ensure you’re charging VAT correctly.
• Proper Business Structure Planning: Consulting an accountant for tax-efficient structuring.

FAQs

1. Can I run two businesses under different names to avoid VAT?

No. If the businesses are artificially separated to avoid VAT, HMRC will investigate and combine them for VAT purposes.

2. What happens if HMRC finds my businesses are artificially separated?

HMRC can apply backdated VAT registration, issue penalties, and charge interest on unpaid VAT.

3. How can I prove my businesses are separate?

Ensure they have different legal structures, bank accounts, employees, premises, and customer bases.

4. Can I split my business into two companies and keep them separate for VAT?

Only if they are genuinely independent businesses with no significant overlap in operations.

5. What if I have already split my business and HMRC investigates?

Seek immediate advice from an accountant to assess your position and mitigate potential penalties.

Conclusion

Attempting to split a business artificially to avoid VAT is a high-risk strategy that can lead to serious consequences. However, with proper structuring and legitimate tax planning, businesses can optimize their VAT obligations legally. If you need expert advice on VAT planning, feel free to contact us today!