Understanding VAT and disaggregation of a businesscreative77
Not sure at what point you need to register your business for VAT? Or what this means? Our article explains a little more about this…..
If your annual taxable turnover exceeds the VAT threshold during a rolling 12-month period, or you believe it will do so within the next 30 days, you need to register your business for VAT. Or for our clients we can do this for you.
Although registering can offer benefits for some businesses, the requirement to keep records and file VAT returns digitally also results in further administration for you.
It also means you need to charge more to your customers. These are the two reasons why some companies and sole traders decide to disaggregate their business.
What is disaggregation of a business?
Disaggregation means separating a business to avoid registering for VAT. The VAT threshold is £85,000 for the 2021/22 tax year, so if it looks likely that your business will exceed that amount, you may believe it’s a good idea to split it up. However this is not something that we would recommend……
Is disaggregation legal?
HMRC views disaggregation as tax avoidance and you could incur heavy penalties, including fines and prosecution, if they believe you’ve disaggregated your business to avoid paying tax.
HMRC takes the view that businesses deliberately disaggregating gain a competitive and a tax advantage and they scrutinise each business on a case-by-case basis.
This is why the professional insight of a qualified accountant is extremely valuable before you take any action you believe would be beneficial to your business, as this might not be the case!
But how does HMRC determine that a business is avoiding tax in this way, and what are the penalties for artificially splitting a business?
How does HMRC determine disaggregation?
HMRC looks at various aspects of a business to establish whether the businesses are linked, and that disaggregation has taken place simply to avoid VAT registration.
They will examine financial, organisational, and economic links between the businesses, and will look to prove that disaggregation has resulted in VAT avoidance.
These are just some scenarios that could cause HMRC to investigate further:
• A single bank account being used for both businesses
• A spouse or member of the family running one of the businesses
• The businesses being financially dependent on each other
• Operating from the same office or building
• Using the same business equipment
• The same employees working across both businesses
So what action can HMRC take regarding disaggregation?
HMRC can aggregate businesses they believe have been deliberately split with a view to avoiding VAT registration. A business’ total taxable turnover will then exceed the VAT threshold, and registration becomes mandatory.
Disaggregation notices, or Notices of Direction, are used by HMRC to inform business owners that they must treat their businesses as a single business for VAT registration purposes.
If HMRC conclude that the businesses have been a single entity for some time, they may also issue a demand for backdated VAT.
There are some scenarios where disaggregation is legitimate – where regulatory obligations require it, for example – but if you are in doubt please get in touch before taking any action.