VAT advice anybody? Is splitting a business to avoid VAT allowed?

[MoosMa]

Our business is nearly at the VAT limit so we've been advised by a few people (not accountants) to split the business in 2 from April as we do 2 very different things under on name at the moment.

Someone's mentioned (on another thread on here) that this might be an outdated idea and gave me the impression that it might not be legit.

So, is it do-able and is it allowed?

As far as I am aware it is perfectly fine. Our accountant suggested to us that we could do the same. We have decided to be VAT registered though. On the downside- two sets of accounts to keep and double the tax return stress!

I don't mind doing extra bookwork and the tax return was fairly stress free, the accountant did it all for us. I think it will only cost about an extra £100 a year for that so if it can be done then it's deffo worth it!

Can I just ask why you are so against registering for VAT? DH (sole trader) had to do it a few years ago and even though he is technically under the threshold now, has not applied to de-register.

One advantage is that if you go on the 'flat rate' scheme you will end up making a small profit from it as you pay to the govt at a slightly lower rate than you levy from your clients.

Also if you are worried about accountant's fees going up, you can easily submit payment yourself, DH has not used an accountant for a few years once he got his head round the paperwork. I have read the VAT form myself and it's pretty simple.

Here is more info about the flat-rate scheme.

We mostly provide services to private customers so we wouldn't be able to claim much back from things we buy and we'd have to up our hourly rate to the customers to cover the VAT cost. I think it works out best if we can stay unregistered. What does your DH do?

Moosma, I will have to check with DH but that's not how the flat-rate scheme works. Your customer pays you VAT at 17.5% on top of your standard rate. Then you pass that VAT on to the govt at a flat rate of say 15% of your turnover (I think it varies according to what business you are in). You pocket the 2% difference. You do not claim back VAT on anything you buy.

If you have mostly individual rather than company clients then, yes, your clients will have to stump up another 17.5%. So if you are in an industry where most of your competitors aren't VAT-registered, I can see that it might make your prices less competitive. But if most of your competitors charge VAT I don't imagine it will come as too much of a shock. Of course any corporate clients can claim VAT back so it won't matter to them.

DH is a journalist, by the way. I will ask him about trying to stay unregistered, as he did look into it. But my gut feeling is that if you split the business for the sole purpose of avoiding VAT it will be viewed as tax evasion.

was it this thread you are referring to? ee my link on the last post re income splitting.
I would be very very very wary of this - take professional advice from your accountant.

Might be worth speaking to businesslink as they have financial advisors (accountants)
We used them in the past for our business

Re registering I assume most of your customers could claim back the VAT or are the individuals rather then companies?

CS it wasn't that thread, but I'll have a read through it later.

Pickie they're individuals not companies which is why we want to avoid it. DH would have to charge £29.38 an hour instead of £25, our nearest competitor charges £35 so we'd still be cheaper than him, but still we'd rather not become too expensive.

look at the link I posted. You would be on very dodgy ground I think.

I've just read it and agree we might be a bit close to the line, I think I'd better speak to our accountant. Thanks all, you may have saved our bacons! [gets worried about having to do VAT]

I think whether you would get away with it depends on how separate your two businesses genuinely are. Eg if you have the same premises/equipment then it would be considered an artificial separation.

The link which Chasingsquirrels just posted basically tells you everything you need to know. If you look at section 13.5, 'What HMRC will regard as artificial separation', if you fall into any of those categories you cannot separate for the purpose of VAT avoidance.

I still hold that in the long run VAT registration is not a bad thing. For example, it will show that you are a legitimate and successful business which may encourage customers to use you. And if you are saving some money on the flat-rate scheme then you could use that saving to cut the rates you charge.

VAT isn't that difficult once you get a grip on it. HMRC would come down hard on you if you are avoiding it though.
Look at the flat rate schemes, it can be easier and slightly more profitable - and you get to pay an extra 1% less in the first year if you do it within 12mo of VAT registration.
Bear in mind that the VAT limit will increase in April - are you looking at the new registration rates?
Also look at the cash-scheme, where you pay on receipts/payments not invoiced amounts.
Finally, are any of the amounts that you charge valid disbursements (ie recharges of your travel, etc) that you don't make a profit on? If so these aren't income as such. But you can't make a profit on them.

What's the limit now and what's it about to be?

section 2.2 - £64,000 now
I can't find the April 08 limit - will post if I find it.

Oooh, that's higher than I thought, I had 55 in my head. We're not going to go over this year but may next year (depending what the limit changes to).

If we go over in 2008/09 then we don't have to go registered until 09/10, is that right?

not quite right - basically;
(a) at the end of any month, the value of your taxable supplies in the previous 12 months or less, is over the registration threshold (unless you expect that the value of your taxable supplies in the next 12 months will not exceed the deregistration threshold (see paragraph 2.3); or

(b) at any time, you expect the value of your taxable supplies in the next 30 day period alone, to go over the registration threshold.

Don't be scared by doing the VAT return stuff - it really is very straight-forward and ends up to our financial advantage with the flat-rate scheme.

Meant to add - regardless of the legalities, the whole 2 companies thing sounds like an administrative nightmare: two sets of accounts, two corporation tax returns, two employer returns etc etc.

Yes, be careful of tipping over the threshold in any given month before registering, or you will get fined.

So say for exanple in August, we've turned over 64,000 (or whatever it's changing to) since the previous september, when do we have to register? Is it instant or is it the next financial year? [brain hurts]

We don't do coropration tax and employer stuff, it's just DH and me and we're not ltd.

You have until the end of the quarter in which you breach the threshold, to register. Your VAT office will then issue you a VAT number and start date.

I see, and by quarter you mean end of March, June, September or December yes?

As you can tell this is all very new to me and I'm quite dim sometimes!

I would imagine if you are close to the threshold it may be easier to just register and avoid the trying to work out if and when you'll hit the threshold. It really isn't hard to do a return. Just seems scary. I'm sure your accountant would help with the first few. Either do them for you or check your workings. For a small fee of course

You have to notify within 30 days of the month end.
So if in May, you exceeded the limit for the previous 12 months, you have to notify them by 30 June.
You have to check this at the end of each month, NOT just at the end of your accounting year.

Eddas - it MAY just be easier to register - BUT it means you are hitting your customers with a 17.5% increase if they aren't VAT registered - which won't go down well (and it they don't mind they you should be charging them more!).

I will find out the new limit tomorrow when I am in the office.