As of 1 April 2024, the VAT registration threshold in the UK increased from £85,000 to £90,000. This means during twelve months, businesses with taxable sales exceeding £90,000 must register for VAT. The same applies if sales are forecasted to surpass this threshold in the next 30 days.

Understanding Business Splitting

Businesses nearing the VAT limit may consider splitting their operations into separate entities. For example, a company that provides catering services and operates a small café, may operate their catering services as a sole trader and create a limited company to keep the café. This means that each business would keep its sales under the £90,000 threshold and thus would be exempt from the VAT tax registration proceedings.

HMRC’s Perspective on Business Splitting

HMRC is authorised to assess the situation of this substitution if authorities suspect that the business split is purely artificial. If a connection between the two companies is found, HMRC will treat as one entity for VAT purposes.

For this to happen HMRC must find each of the three connections—financial, organisational, and economic. The VAT Act 1994 is the enact which refers to the prevention of the VAT spitting strategy.

How to Properly Manage Business Splitting

If splitting your company to keep the VAT threshold is something you are considering, remember that it must be done properly. Here are some of the main points to bear in mind:

• Separate Accounts: Make sure there is a bank account, supplier account, and invoicing system for every business. 
• Clear Branding: This can be accomplished by creating separate websites and marketing materials.
• Distinct Records: Keep different accounting records and systems for each company.
• Ownership Structure: Two different people should be the managers of different companies.
• Clear Activity Separation: There should be a clear distinction between the activities of each business.
• Shared Costs: If one business pays costs for both entities, make sure these are charged at arm’s length.
• Financial Independence: Ensure one business is not financing the other.

Potential Risks

Incorrect handling of this separation can lead the HMRC to a conclusion that the two businesses were not really separate. Causing a backdated VAT registration, that could go back for years—with a possibility of the insolvency of these small businesses.

While business splitting can be an effective approach to VAT management, it should be exercised with the upmost care. If it is something you are considering we highly recommend getting a professional opinion to avoid pitfalls.

Updates – VAT Single Entity and Disaggregation – HMRC internal manual – GOV.UK (www.gov.uk)