Business splitting - VAT

Posted: 16th January 2012

Where a business has different facets and ownership, it is normally possible for the legal identities to be kept separate.

This can have advantages where one part of the business supplies goods or services to the final consumer (so that, in effect, the VAT is borne by the supplier) and a separable part of the business trades under the VAT limit (currently £73,000 per year).
‘Artificial business splitting’ is commonly used in farmhouse B&Bs and also in the licensed trade. HM Revenue and Customs (HMRC) are not fond of the practice and often contend that unless strict criteria are observed (separate accounts and ownership, for example), the two businesses should be aggregated for VAT purposes.
There are signs that HMRC are taking a tougher attitude to business splitting. They recently brought a case before the London VAT Tribunal seeking to aggregate the income from a B&B business with that of the farm in which it was based. What is most surprising is that HMRC had acquiesced in the two businesses being dealt with separately for more than 30 years.
HMRC lost the case, but it serves as a timely reminder to those who run more than one business, one of which is not VAT registered, that care needs to be taken to organise structure and practices to avoid problems of this nature.