Disaggregation as applied to businesses and in this article concerning the VAT implications simply means that a business owners have decided to split the business into constituent parts. This could be for logistical, geographical and other quite sound reasons. But according to HMRC the main reasons these days to “split” a company is to avoid being charged VAT as the business nears the VAT threshold of £85,000 a year. There can, of course, be good business reasons for splitting a business, but a business owner considering this needs to be very careful, as HMRC is very much against any artificially constructed separation of a business.
Some of the businesses that can be split for legitimate reasons are:
- Driving Schools
- Managed “Pubs”
- Taxi Companies operating in an approved way
There could be circumstances though that would be a red flag to HMRC so ask an accountant or financial advisor after doing some research online at HMRC’s VAT Single Entity and Disaggregation web page. Also see the resources at the end of this article.
VAT Disaggregation and HMRC
When a business is split into two, the intention is to allocate revenue across two different businesses in effect making the threshold 2 X £85,000 (as at 2018/2019) or £170,000. This can be a competitive advantage especially if most of the goods of a business are zero rated.
According to HMRC, this qualifies as tax avoidance (not evasion which is illegal) and is more inline with the “creative accounting” of the larger multinationals like Google, Amazon and Apple who “split” companies between different countries. This is why there are rules about when splitting is allowed and only “business splitting” is accepted by the law when the reason is not for this artificial way of avoiding the Tax threshold. To do this, a business owner has to prove that there is no financial, or economic or other reason other than business for the split. If legitimate arguments are not provided HMRC will prosecute or impose penalties. The following are a few of the ways HMRC will determine if a business is not “splitting” for reasons within their accepted rules …
- Use of the same bank account
- Both businesses have similar interests and profits
- They depend on each other financially
- Shared equipment, Office space. Advertising
- Same employees,managers or directors.
There are of course valid reasons to split a business but that is beyond the scope of this article and you need to contact HMRC or use the resources here
Suffice to say any business disaggregation needs to be done in a way that convinces both HMRC and customers that those two businesses are completely free and independent .
To split or not to split – that is the question
In case you are not sure if disaggregation would be better for your company then an accountant’s advice is crucial. If the accountant warns you off – heed the advice, Tax avoidance although not illegal can get you and your financial advisor in hot water. You don’t have the luxury of expensive lawyers that the likes of Google and Apple have so tread carefully before contemplating such a split.