November 7th, 2019
What is VAT disaggregation and does it affect me?
VAT disaggregation is where business owners artificially split their business activities in order to avoid hitting the VAT registration threshold (currently £85,000) and having to charge their customers VAT.
This is deemed to give such businesses an unfair advantage and is considered by HMRC as a form of tax avoidance, meaning that they may aggregate businesses for VAT purposes if the businesses have not been split for legitimate reasons.
Affected businesses would need to prove there are no financial, economic and organisational links between all the separated parts of the businesses to avoid HMRC aggregating the businesses for VAT.
Examples of these links are as follows:
Financial links
- Financial support given by one part to another part
- One part would not be financially viable without support from another part
- Common financial interest in the proceeds of the business
Economic links
- Seeking to realise the same economic objectives
- The activities of one part benefit the other part
- Supplying the same circle of customers
Organisational links
- Common management
- Common employees
- Common premises
- Common equipment
Where these kinds of links apply, HMRC may insist on the affected businesses registering for VAT as a single entity going forward. However, if HMRC decides that it was a single business all along, late VAT registration comes into play. This could have a serious impact on those involved, as HMRC can go back as far as 20 years when it comes to late VAT registration.
This may not be too much of an issue for businesses whose customers are VAT registered, as they could issue VAT-only invoices to collect the VAT from earlier periods, however this is unlikely to be an option where customers are the general public, in which case the affected businesses would probably have to take the hit for the retrospective output VAT due.
Where there are genuinely separate legal entities, HMRC would expect to see the likes of the following:
- Separate business bank accounts
- Separate business records
- Business registered separately for tax and submitting their own returns
- Transparency e.g. customers and suppliers knowing exactly which business they are dealing with
- Transactions between affected businesses being carried out at arm’s length and charged accordingly in the accounts
Ultimately, HMRC will examine VAT disaggregation on a case-by-case basis, and all links would need to be proven (i.e. financial, economic and organisational).
