VAT: Will HMRC challenge your separate businesses?

Robert, the owner of a certain company, approached our accountant with a question about whether he should start a second business and register it for VAT simultaneously. His inquiry raises important questions regarding managing two businesses and the legal and tax aspects associated with such an undertaking. Below, I will outline key points to consider when deciding to open a new business and register for VAT.

Increased Budget and Changes to the VAT Registration Threshold

Let's start by saying that The Budget for 2024/25 introduced changes that may affect Robert's decision. For the first time in seven years, the VAT registration threshold has been increased by £5,000, reaching £90,000. These changes came into effect on April 1, 2024, meaning Robert will not have to register his new business for VAT until its taxable sales exceed this amount within twelve months or are not expected to exceed it within the next 30 days.

Client Analysis and VAT Impact

Robert should also consider his client base structure. If most of his current and future clients are VAT-registered and can fully reclaim input tax, adding VAT to sales will not negatively impact commercial relationships. In such a case, operating both businesses as VAT-registered entities might be beneficial. However, if the new business were to primarily sell zero-rated goods or services, or sell to clients who cannot reclaim VAT, considering a single, VAT-registered business structure might be the most advantageous solution.

HMRC Risks and Scrutiny

Robert should be aware that HMRC may closely scrutinize cases where a business is divided in a way that could appear to be an attempt to avoid VAT.

If HMRC determines that the new and old businesses have strong economic, financial, and organizational links, this could lead to them being treated as a single entity for VAT purposes.

It is therefore advisable from the outset to run each business with clearly separate accounting, bank accounts, and documentation. However, these matters should be thoroughly discussed with a qualified accountant, as our clients' experiences often show that poorly made decisions by clients and their advisors have exposed them to high penalties.

Should You Register the New Business for VAT?

The decision to establish a new company and register for VAT requires a thorough analysis of projected turnover, client structure, and potential interactions with current tax regulations. Robert should also consider the operational capabilities of both businesses to ensure they can function independently and that any transactions between them occur at market rates. This comprehensive assessment will help avoid potential complications with HMRC and safeguard the stability of both ventures.