Separating a Business?

The issue in question here is the possible artificial separation or disaggregation of businesses and, due to its subjectivity and the fact that HMRC’s guidance is more or less wholly withheld due to the Freedom of Information Act, is an area of VAT where it is virtually impossible to provide a definitive answer.

However, the starting point is HMRC’s policy on the area of VAT, which is to some extent detailed in Statement of Practice 4 (1983).

This statement confirms that the relevant legislation in this area allows HMRC to use the issue of artificial separation or disaggregation of a business if the splitting of a business results in an avoidance of tax; there is no requirement that the purpose of the split must be to avoid tax.

Clearly, irrespective of your client’s intention, their proposed splitting of activities into 2 different companies will result in an avoidance of tax if the new company does not immediately register for VAT after the separation.

Where the separation results in an avoidance of tax, then, in order to use the legislation, HMRC must establish that the entities are economically, financially and organisationally linked, and only if all 3 types of link exist can HMRC use it.

When considering the above, HMRC consider all and any economic, financial and operational/commercial links between the businesses and tend to look at factors/links such as (but not limited to):

• Common control
• Similar areas of activities
• Trading names of the business
• The ultimate beneficiaries of the business, i.e., do the businesses provide income for the same people, e.g., partners, directors, shareholders, etc.
• Customer base of each business (Do they provide services to the same customers?)
• Supplier base for each business (Do they use the same suppliers?)
• Shared use of resources and assets
• Operation from the same premises
• Common/shared insurance policies
• Common/linked advertising and websites
• Common/shared bank accounts
• Common/shared management accounts
• Financial support by one business to the other
• One business obtaining sales or customers from the other

If HMRC decide it is appropriate to use this legislation, there are one of two actions they may choose to take:

If they consider that the split never really created 2 businesses, then they can retrospectively aggregate the businesses’ activities, treating it as though the split never happened and treating both entities as one business back to the time of the separation.

However, if HMRC accept that the entities are indeed separate but still consider that they operate sufficiently closely together as to be considered one business for the purpose of VAT, then they will issue a Notice of Direction, which requires the 2 entities to register for VAT as if they were one business, but this will only be from either the date of the notice or a future specified date. In this situation HMRC currently has no powers which would allow them to retrospectively apply any such direction.

Ultimately, given the subjectivity of the issue, there can be no point before which the links can definitively be said to be insufficient for HMRC to make a case for artificial separation or disaggregation and beyond which they would, but as a very general rule of thumb:

• If there are no links at all between the separated businesses, then there is no chance that HMRC would challenge them, but
• The more links between the businesses, the increased chance of HMRC challenging.

For more information, please contact us at: consultancy@vantagefeeprotect.com

Tony Pocock
Senior Vat Consultant