VAT and Multiple Business Entities 5

No-one in their right mind wants to pay more tax than is necessary, but remember there is a very distinct line between tax avoidance and tax evasion, you don’t want to come down on the wrong side of it.

VAT is one area where as a business owner you may think you can save a few pennies, especially when you have separate entities that can very much be split in terms of VAT, for instance you may have a product that you are selling to registered and unregistered customers. The VAT-registered entity sells only to VAT-registered customers, and the entity not registered for VAT sells to customers who are not registered for VAT. Sounds simple enough, however this is exactly the type of situation that HMRC are particularly annoyed by. HMRC sees your business as a single taxable person for the purposes of VAT. It’s the person who is registered, and not the business. If the same person owns two separate businesses, they need to be considered together for VAT registration and accounting purposes. If you want to run as two businesses with different VAT status, then it’s necessary to ensure the ownership details of the two businesses are different and that the disaggregation isn’t artificial.

So are there any legal ways round this? There are, some of them more cumbersome than others:

Joint ventures

If you and another person intend to work together on a business or project as a joint venture, HM Revenue and Customs (HMRC) may consider this as a partnership. This would be a new and separate person for VAT registration purposes. The joint venture may have to register for VAT if its turnover is above the relevant threshold.

Group registration

Two or more companies or limited liability partnerships can register as a single taxable person or VAT group if, each body has its principal or registered office in the UK and they are under common control, for example 1 or more company is a subsidiary of a parent company or If the turnover of the VAT group is over £10 million per year and the group is partly owned or managed by a third party. But you must also take account of the facts that you can only register as a group for VAT if – no more than 50% of benefits generated by the business go to third parties, your group uses consolidated accounting, no third party consolidates your group into its accounts.

A VAT group is treated in the same way as a single taxable person registered for VAT on its own. The registration is made in the name of the ‘representative member’, who is responsible for completing and submitting a single VAT Return and making VAT payments or receiving VAT refunds on behalf of the group. All the members of the group remain jointly and severally liable for any VAT debts.

With a group registered and approved for VAT you could them add or remove the necessary companies from your group. Once you are registered as a group, you can make the following changes:

– add additional members to an existing group

– remove members from an existing group

– change the representative member

– disband the group

Divisions or business units

A body with business units or divisions that are not limited companies may be able to register each of them separately for VAT. Each unit or division would have its own VAT registration number and each must account separately for VAT. Even though each division would be VAT registered separately, the body corporate is still a single taxable person and remains liable for any VAT debts of all the divisions. You cannot combine divisional VAT registration and VAT group registration.

For the purposes of divisional VAT registration, a body corporate is trading in divisions if:

– it has 2 or more branches, sites or departments that carry out different functions or trade in different geographical areas

– each branch has its own independent accounting systems

As you can see VAT is a potential minefield and you should not go into registration lightly or without the advice of a good accountant, obviously Magpie Accountancy will be your first choice! Get in touch, we always love to talk business.