Artificial Separation – Separating Businesses for Tax Avoidance Purposes

Known as ‘Artificial Separation’ or ‘Disaggregation’ – some businesses may separate the different elements of their company to multiple separate legal entities – in reality they are one company and the main purpose of separating them is to avoid VAT, something that can lead to serious consequences.

Common examples of businesses that may consider artificial separation include many leisure industry operators such as hotels separating rooms, food and drink, and spa elements or wedding venues separating the venue hire from income from guests using B & B facilities during the occasion.

This approach is not recommended – with HMRC considering businesses to be artificially separated if they meet the following criteria:

  • The businesses operate in the same location or share equipment on a regular basis;
  • The businesses have the appearance of one single business rather than multiple separate identities;
  • The same person controls a number of businesses providing the same/ similar services e.g. a chain of restaurants;
  • A single supply is being split e.g. separating the restaurant and bar income in a single venue;
  • The business supplies registered and unregistered customers.

Following the rule of ‘same people, same trade, same premises’ if you are unable to prove that businesses are separate entities you may have to face the consequences of artificially separating a business to avoid VAT, HMRC can impose penalties, as well as enforcing a backdated VAT demand for the VAT due based on the businesses being only one entity.

Whilst you may appeal against such a decision, any business needs to consider the cost and resource such an activity would require – potentially wiping out any savings you may have made in the first place.

If you are considering how to best manage your tax liabilities and to make the most of your business, Harvey Telford & Bates Chartered Accountants in Shrewsbury can provide tax and business support. We can also act on your behalf for all matters concerning HMRC – so you can get on with the essential tasks involved in running your business. Call 01743 462604 or email [email protected] to find out more today.