VAT ruling on artificially separating businesses

What is the consequence of HMRC reviewing how my businesses are split?

If either or both “businesses” are not currently VAT registered and the combined turnover from the businesses when looked at together exceeds the VAT registration threshold then HMRC may require the businesses to be VAT registered retrospectively from the time the threshold was breached.

Businesses dealing with non-business customers will find it extremely difficult to retrospectively charge VAT to customers and could be left with the output VAT due on these sales as an additional cost to their business.

Situations and factors HMRC may review may include the following:

• Separate entities selling to registered and unregistered customers. The VAT-registered entity sells only to VAT-registered customers and the entity not registered for VAT sells to customers who are not registered for VAT.
• The same equipment or premises being used by different entities on a regular basis. The premises and/or equipment are owned by one of the parties, who charges rent to the others. This situation may occur in businesses such as launderettes and takeaway food operations.
• Splitting up what is usually a single sale. This is common in industries such as the bed and breakfast trade, where one business supplies the bed and another the breakfast.

The tribunal case

The recent VAT Tribunal Case Howard and Jennifer Patrick, highlights this risk that HMRC may deem that “artificial separation” of businesses has taken place and that the businesses are a single taxable person and therefore must be registered for VAT.

East Hook Farm in Pembrokeshire is run as a partnership by Mr Howard Patrick and his wife, Mrs Jennifer Patrick. The business, which is VAT registered, includes the traditional farming activities of beef and sheep production as well as a haulage operation and the provision of self-catering accommodation in an outbuilding that has been converted into a holiday cottage.

In addition to, and quite separate from, the farm partnership, Mrs Patrick operates a Bed and Breakfast business as a sole trader. The farmhouse is used to accommodate B&B guests with two additional rooms, in the same building as the self-catering cottage, used for those guests unable to use stairs or requiring disabled access. As its turnover was below the VAT registration threshold this business was not registered for VAT.

The ruling

HMRC challenged the treatment of the B&B as a separate business and issued a direction that the farm and the B&B should be treated as a single taxable person, registered for VAT. This direction was upheld by the Tribunal.