Splitting a business to avoid registering for VAT

As the VAT registration threshold is to be frozen at £85,000 until at least April 2022, more businesses will be drawn into the VAT net simply by increasing their prices by inflation every year.

If you do not want to register for VAT you either have to keep your total sales low by working fewer hours or consider splitting the business into two entities, each with turnover under £85,000. Business splitting is legal but needs to be done correctly to be effective for VAT purposes.

First identify the separate products or services you supply and whether you provide them to different groups of customers. For example you may clean commercial buildings for business customers and domestic premises for non-business customers. The commercial cleaning services could be provided by a company and the domestic cleaning by a partnership. Although you control both entities, the back-office support must be managed carefully to ensure HMRC agree that two businesses exist in practice.

You should:

• set up separate bank accounts and insurance for each entity;
• purchase supplies through distinct orders in the name of each business; and
• make sure the correct business bank account is used to pay for the goods acquired and deposit sales income.

If both businesses operate from the same address, set up a formal lease agreement under which one business sublets part of the area to the other. If employees work for both businesses the costs should be charged across at the point one business lends the employee to the other.

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