HMRC will look closely at businesses that are connected by common owners, especially if one or more of the businesses are not registered for VAT. If HMRC believes that the businesses have been artificially separated to avoid VAT then they can assess them for VAT due on past transactions, if the businesses have not separated successfully, or issue a notice compelling the separate businesses to register as one from a future date.
In general, HMRC will apply these rules where the businesses have connected owners and similar activities.
HMRC have issued a statement of practice which sets out how they will apply the provisions aimed at countering the artificial separation of businesses to enable each to trade below the VAT registration threshold.
The main reasons are:
to avoid unfair competition where businesses are artificially split, with no VAT charge on their supplies and therefore they can charge lower prices than others who have registered for VAT, and
to avoid the loss of VAT due to the Exchequer where businesses do not register to pay VAT.
How the Statement of Practice will be applied
HMRC should focus on the effect rather than the reason for an artificial separation in two or more businesses. This is to counter artificial separation, which results in an avoidance of VAT. HMRC will therefore not look to aggregate businesses unless they are satisfied that the separation is artificial.
Under the statement of practice, HMRC may only make a direction to aggregate one or more business when:
the separation is artificial
the separation results in an avoidance of VAT
the parties involved are closely bound by financial, economic and organisational links
other legal requirements are satisfied
What HMRC will consider to be artificial separation
HMRC will be concerned with separations, which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances.
It is not possible to provide an full list of all the types of separations that HMRC will view as artificial. The following are examples of when HMRC should make further enquiries:
Separate entities supply registered and unregistered customers
In this type of separation, the VAT registered business supplies VAT registered customers and the non VAT registered business supplies non VAT registered customers.
Same equipment/premises used by different entities on a regular basis
A series of businesses operate the same equipment and/or premises for a set period in any one week or month. Generally, the premises and/or equipment is owned by one of the parties who charges rent to the others.
Splitting up of what is usually a single supply
This separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals.
Artificially separated businesses which maintain the appearance of a single business
This includes pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and drinks as bought from the pub and not from two independent businesses. The relationship between the parties in these circumstances is important as truly franchised ‘shop within a shop’ arrangements will not normally be considered artificial.
One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations
A number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person.
The meaning of financial, economic and organisational links
Each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:
Financial links
financial support given by one part to another part
one part would not be financially viable without support from another part
common financial interest in the proceeds of the business
Economic links
seeking to realise the same economic objective
the activities of one part benefit the other part
supplying the same circle of customers
Organisational links
common management
common employees
common premises
common equipment