VAT – what is disaggregation

There are many businesses that benefit from not being VAT registered. In the UK, there is no obligation to register until your taxable turnover exceeds £85,000. For many smaller businesses, especially those that buy and sell goods and services in competition with larger concerns, charging their customers without the 20% VAT add-on can be a compelling advantage especially when they are selling to the public, who can’t reclaim the VAT they would otherwise be obliged to pay.

There is a temptation for traders who want to capitalise on this competitive advantage, to split off parts of their business into a separate trade if VATable turnover was likely to exceed the £85,000 registration limit. In this way, the two businesses could bill up to £85,000 each and therefore double their advantage in the market place.

Unsurprisingly, HMRC are not keen on this strategy and the disaggregation – business splitting – rules basically outlaw this attempt at avoiding VAT registration.

To challenge this type of arrangement, HMRC need to be able to prove that the two (split) businesses have “financial, economic and organisational links.” For their challenge to work, HMRC must prove that all three apply.

In practice, this still offers planning opportunity for smaller businesses, but to be successful achieving the necessary arms-length outcome can be difficult especially if family members are involved. There are other issues that need to be considered. For example:

  • Separation of bank accounts and business records.
  • Each business must be separately registered with HMRC and submit its own tax return.
  • Customers should be convinced that they are dealing with two businesses.
  • Any charges for goods and services between the split businesses must be conducted at arm’s length.

Traders who are approaching the registration threshold, and would like to consider splitting off part of their trade to a separate business, should undertake careful planning to avoid the disaggregation rules, if that is possible. Please call if you would like to discuss your options.

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