Understanding VAT and the Threshold
In the UK, businesses must register for VAT (Value Added Tax) if their taxable turnover exceeds £90,000 in a 12-month period. Some business owners consider setting up two businesses to avoid VAT, keeping each below the threshold. But Can I have 2 businesses to avoid VAT? Is this even legal? Let’s break it down.
Can You Run Two Businesses to Avoid VAT?
The short answer is no if your goal is to split businesses purely to avoid VAT. HMRC has anti-fragmentation rules, meaning if two businesses are run by the same person and provide similar goods or services, they might be treated as one for VAT purposes.
When Is It Allowed?
You can have multiple businesses, and each might have separate VAT obligations if they:
- Operate in different industries (e.g., one business sells handmade crafts, the other offers consulting).
- Have distinct financial records and operations (separate bank accounts, suppliers, and branding).
- Are genuinely independent with different management and not designed to bypass VAT.
HMRC’s Anti-Avoidance Measures
HMRC may investigate if businesses appear artificially separated. They look at:
- Shared resources (same staff, premises, equipment).
- Customer overlap (do both businesses serve the same clients?).
- Common financial links (interlinked finances suggest one entity).
If HMRC finds tax avoidance, they can combine the businesses’ turnovers and apply VAT backdated with penalties.
Alternatives to Reducing VAT Costs
Instead of splitting businesses, you might consider:
1. VAT Flat Rate Scheme
If your turnover is under £150,000, you could benefit from the Flat Rate Scheme, where you pay a fixed percentage of your turnover instead of reclaiming VAT on expenses. It simplifies VAT calculations and may lower your tax bill.
2. VAT Cash Accounting Scheme
With the Cash Accounting Scheme, you only pay VAT when customers pay you (not when you issue an invoice). This helps manage cash flow, especially if you have late-paying clients. Businesses with turnovers up to £1.35 million can use this scheme.
3. Voluntary VAT Registration
Registering for VAT voluntarily (even below £90,000) allows you to claim VAT back on business expenses, potentially saving money.
What Is VAT Disaggregation (Artificial Separation)?
HMRC calls this strategy VAT disaggregation, which means splitting a business into separate entities to stay under the VAT threshold. While having multiple businesses is legal, HMRC may see artificial separation as tax avoidance and take action.
How HMRC Identifies Artificial Separation
HMRC checks if businesses are truly independent by looking at three key factors:
1. Financial Links
- Shared bank accounts or finances
- One business funding the other
- Joint business loans or payments
2. Economic Links
- Same location or premises
- Shared equipment or resources
- Cross-promotion or shared customers
3. Organisational Links
- Same owners, directors, or management
- Employees working for both businesses
- Coordinated decision-making
If HMRC finds strong connections, they may combine the businesses for VAT purposes, meaning both would need to register for VAT.
When Is Having Two Businesses Acceptable?
You can have two businesses without VAT issues if they are truly separate. Some key factors include:
- Different business models or industries
- Separate bank accounts, records, and tax filings
- Independent branding, marketing, and websites
- No shared stock, equipment, or staff
If your businesses meet these criteria, they may remain separate in HMRC’s view.
What Happens If HMRC Challenges You?
If HMRC believes businesses have been artificially split to avoid VAT, they can:
- Combine turnover and enforce VAT registration
- Issue penalties for unpaid VAT
- Investigate for tax evasion, which could lead to legal action
How eAccounts Can Help
At eAccounts, we specialise in helping UK businesses manage VAT compliance. Our team ensures your structure is legitimate, avoiding costly HMRC challenges. If you’re unsure about VAT rules, get in touch for expert advice.
FAQ: Can I Have 2 Businesses to Avoid VAT?
Can I run two businesses and not pay VAT?
Yes, but only if they are truly separate businesses. If they are linked, HMRC may require you to register for VAT.
Can I split my business to avoid VAT?
If the split is purely to avoid VAT, HMRC will likely challenge it. A genuine split with separate finances, branding, and operations may be allowed.
What happens if HMRC finds artificial separation?
HMRC can combine your businesses, enforce VAT registration, and apply penalties for underpaid VAT.
How can I prove my businesses are separate?
Keep separate bank accounts, tax filings, branding, and premises. Ensure there are no financial, economic, or organisational links between them.
Do I need an accountant to handle VAT?
Yes! A professional accountant, like eAccounts, can ensure compliance, avoid VAT pitfalls, and help structure your business legally.
Is the VAT Flat Rate Scheme better for small businesses?
For businesses with low expenses, the Flat Rate Scheme can simplify VAT payments and reduce tax liabilities. However, it’s best to compare it with standard VAT registration to see which saves more.
Can I use the VAT Cash Accounting Scheme to delay VAT payments?
Yes, the Cash Accounting Scheme allows you to pay VAT only when you receive payments, helping businesses with cash flow issues.
Get VAT Advice from eAccounts
If you’re unsure about VAT rules or can I have 2 businesses to avoid VAT? Contact eAccounts today. Our experts will help you structure your business properly while staying compliant with HMRC regulations.
