Reply to: Need a strategy for staying in the flat rate VAT scheme

[meridian]

Ah, of course.

Back to the split, would HMRC really see this as a business decision that was not solely to avoid tax? From the original post, the company has already won the new contract and he's looking to do the disaggregation at renewal time.

[jamesbrown]

When on the FRS the threshold increases to £230,000 p.a. which may explain the difference.

Personally I would recommend splitting the companies into two.switch the shareholdings to 100% each and would be justifiable for business reasons if you were to be looked into by HMRC.

No, I don't think that's it. IIRC, there are two separate thresholds that reflect the asymmetry of joining versus leaving (because turnover can vary). The threshold for joining the FRS is 150k. The threshold for leaving the FRS is 230k.

Edit: unless by "on", you meant "already participating in", in which case, I agree. The threshold is different for joining vs. leaving.

[jamesbrown]

The artificial separation rules for VAT do NOT apply here as both businesses are not the same. As both businesses are distinctly different (i.e. IT contracting and hair dressing for example) there is no artificial separation as both businesses are not integrated either organizationally, financially or economically. Without this fundamental integration any separation is NOT artificial, and can and has been achieved perfectly legally. The separation is entirely reasonable and not artificial, i.e. simplifying your accounting and tax by creating separate companies and de-risking the single company from the liability dangers of running two different and growing trades through it.

Unfortunately it appears that there are a lot of amateur HMRC VAT inspectors in this forum and I'm completely stunned by Alan's comment. I would suggest he reads Items 1A and 2 of Schedule 1 of VAT Act 1994 and ceases advising people on VAT (and tax if his advice on VAT is anything to go by).

I never thought I would say this but for once I have to agree with NLUK. SPEAK TO YOUR ACCOUNTANT!!!!!!!!!!! Most of the advice within this thread is absolute NONSENSE and completely misinformed.

There are two aspects to this, separation and intent. They may be distinct businesses; the OP asserts this, but we're not talking about hairdressing vs. IT consultancy here, that is an obvious straw man, and it's unclear how much is shared in practice (insurance, equipment, bank accounts etc.). However, the intent is clear. Read the title of the thread FFS and consider the timing of the disaggregation in relation to the turnover from the combined businesses. The OP may be able to demonstrate that the disaggregated businesses are independent and run separately, but clearly would not be able to show that VAT avoidance was not a (indeed the) motivation for disaggregation.

[Kenny@MyAccountantFriend]

When on the FRS the threshold increases to £230,000 p.a. which may explain the difference.

Personally I would recommend splitting the companies into two.switch the shareholdings to 100% each and would be justifiable for business reasons if you were to be looked into by HMRC.

[meridian]

Still doesn't add up.

FRS limit is £150k excl VAT. At 20% VAT that would be £180k Gross, £30k VAT.

You pay VAT to HMRC at 14% of Gross = £25,200, so the maximum (corp tax taxable) gain you could have would be £4,800.

[dingdong]

FRS is 14% and yes it would be the same if the trades were separated. The only expenses are really train fares and sandwiches!

The trades have always been separate - we've each got our own clients and manage our separate business affairs. The only reason for being together in the same company currently is that my wife was already contracting and had a company setup at the time so it was the easy option at the time.

I guess it comes down to the interpretation of the rules around associated companies.

[JB3000]

My wife and I are both directors of the same limited company working for different clients. This arrangement has worked fine for many years and saved the expense of running two separate companies. However as a result of me finding a lucrative contract this year, we will go over the flat rate VAT limit and would therefore need to leave the scheme in September when we reach our anniversary of joining the scheme.

I’m keen to stay in the scheme as it has generated a few thousand pounds of extra profit each year


What do people think of this strategy:

1) I create a new limited company and we now separate our work going forward (my contract is due for renewal next month so this split could start asap)

2) My new company registers for VAT and joins the flat rate scheme

3) My wife's company would still exceed the limit this year but we would ask HMRC for permission to stay in the flat rate scheme on the basis that the lucrative contract for that company had now finished and future company earnings would definitely be below the limit. (the final VAT return before September would already show a marked drop in turnover after separating into two companies)

I understand HMRC does not like associated companies, but both our companies would be VAT registered, the work we do is very different (and for different clients), and one company would not be under the direction or control of the other. Even if HMRC refused to allow my wife’s company to remain in the scheme we would still be better off at least having one of our companies in the scheme.


What are people’s thoughts on that approach?

Thanks for your help!

The artificial separation rules for VAT do NOT apply here as both businesses are not the same. As both businesses are distinctly different (i.e. IT contracting and hair dressing for example) there is no artificial separation as both businesses are not integrated either organizationally, financially or economically. Without this fundamental integration any separation is NOT artificial, and can and has been achieved perfectly legally. The separation is entirely reasonable and not artificial, i.e. simplifying your accounting and tax by creating separate companies and de-risking the single company from the liability dangers of running two different and growing trades through it.

Unfortunately it appears that there are a lot of amateur HMRC VAT inspectors in this forum and I'm completely stunned by Alan's comment. I would suggest he reads Items 1A and 2 of Schedule 1 of VAT Act 1994 and ceases advising people on VAT (and tax if his advice on VAT is anything to go by).

I never thought I would say this but for once I have to agree with NLUK. SPEAK TO YOUR ACCOUNTANT!!!!!!!!!!! Most of the advice within this thread is absolute NONSENSE and completely misinformed.

[Contreras]

I know the flat rate is officially there to simplify admin, but it did generate 6k of additional profit for us last year hence why its definetly worth the expense of running two companies if there is a way to stay in the scheme

That almost doesn't compute.

What FRS % are you using? Would it be the same if the company trades were each separated?

Does the company really have zero input VAT that could be reclaimed if de-registered from FRS?

And that magic £6k is taxed, obviously.

[PerfectStorm]

Take the extra money and enjoy it. Oh and start claiming the VAT on your sandwiches.

[jamesbrown]

Need a strategy for staying in the flat rate VAT scheme

Splitting into two companies would make sense from a commercial and admin perspective

I agree with Alan@BA. If there was a sound commercial reason to form the joint venture, what has now changed (other than the VAT position) to make disaggregation a sound commercial decision? The answer, of course, is nothing, and this will be blatantly obvious to HMRC. You're simply looking for a plausible excuse.

[dingdong]

I can see how the VAT disaggregation rules would be a concern if one business was attempting to avoid registering for VAT but in my case both companies would be VAT registered.

The FRS rules in notice 733 do state though that associated companies are not eligible to join the FRS but it goes on to say....

"Example 2
A husband and wife are each separately VAT registered in different types of business. Even if they share premises, provided this is charged at a market rate, they will not be ‘associated’."


Splitting into two companies would make sense from a commercial and admin perspective as it would make it much easier to see how each company was performing, so I think i have a sound commercial argument for the split (and I agree we should have had two companies from the outset but I was never expecting to have this lucrative one year contract).

[pmasoft]

Valid reason for second company.......

I am so sorry to hear that you and your wife are having marital difficulties.......

In this situation running separate companies is the logical thing to do with each holding 100% of your own companies. Both on Flat Rate if they qualify on turnover.

Of course I hope you resolve your issues in the near future (after complete tax year maybe?) but still keep the companies running separately until you decide to either merge them or set up a holding company over the top.

[Alan @ BroomeAffinity]

Won't fly. Are there commercial reasons other than tax saving? HMRC will challenge otherwise.

Search "vat disaggregation"

Easy to say now, but you should have had 2 companies in the first place.

[dingdong]

Thanks all.

The shareholding would be 50/50 in both companies.

I know the flat rate is officially there to simplify admin, but it did generate 6k of additional profit for us last year hence why its definetly worth the expense of running two companies if there is a way to stay in the scheme

[eek]

Don't even try it - it looks suspicious.

+1. Your company has clearly reached the point where the flat rate scheme is not required (as officially the only thing it saves is administration). Moving a significant amount of the turnover to another just to keep the scheme going ain't going to go down well...