Splitting a family business: is there a VAT problem? Can VAT registration be avoided?

Splitting a family business may help reduce the VAT registration threshold and avoid registering for VAT. Alternatively if the two businesses are not classed as of the same nature one of the business may avoid registration if not exceeding the VAT threshold. 

Let’s look at the case when a trader is a car dealer and a car repairer. He would like to help his son with his new business. The son is working in the same premises and starting a valeting business. What is going to be a VAT implication in this case? Will this be treated as the same business for VAT purposes? Can they avoid VAT registration for the new business?

VAT treatment of each such case will depend on the structure of the legal entities that run the business. The legal entities in the UK can be sole traders, partnerships limited companies, LLPs, clubs, trusts, charities, and associations.

The trade should set up a new legal entity for his son which should be different from his own. A business does not have to register for VAT until their last 12 months taxable sales exceed £85,000 or they expect to exceed it in the next 30 days.

Tip: being able to avoid VAT registration can be a benefit for businesses whose clients cannot claim VAT.

Consistency should be kept in all aspects of business activities: a bank account to the business name, suppler invoicing, adverting, website, etc.

It is important to set up clear trading terms and the business expenses are properly charges between the two entities.

For example, if the trader decides to buy some supplies for his son’s business taking advantage of favourable discount terms, he should make sure that he charges his son the cost price or higher and issues VAT invoices.

All inter-trading deals should be dealt with on a commercial basis. For example, if the trader buys some equipment for his son and lease it to him, he can claim input VAT on the purchases as long as he leases the equipment to his son on a commercial bass and charges VAT.

If he undercharges his son, HMRC have the powers to assess extra VAT bases on the market value.

If our trader sets up a separate entity as described above, any HMRC charges can be for current or future sales only. The two entities can be treated as one for VAT purposes, if they are closely connected by ‘economic, financial and organisational links’. In such case, the separate entities will be treated as one VAT registered partnership with all income being subject to VAT.

Contact us if you wish to ask more about the topic of this post.

Customer Service – UK-Accountant

Further read:

 VAT Registration Thresholds

When to Register for VAT

VAT Guide (Notice 700)

 

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