Small businesses and their advisers regularly come across the question of disaggregation. The issue is whether two businesses are in fact one business from a VAT perspective and have been artificially split.
Without the disaggregation rules, businesses would stop trading in one company before they reach the VAT registration threshold, set up a new company and begin trading from the new company, repeating the process without ever charging VAT on their sales. The disaggregation rules are therefore important to the integrity of the VAT system. However, there are situations where businesses are genuinely independent despite close links, but HMRC claim the two businesses should be combined.
The issue was considered in the case of Belcher & Belcher v Revenue & Customs Commissioners ( UKFTT 427 (TC), published 4 March 2017). The taxpayers were a men’s and a ladies’ hairdressers. They used some common facilities without cross-charges (eg music, bank account, utilities, insurance, trade account for purchases, company accounts, trading name) and declared direct tax returns as a partnership. HMRC therefore argued that the taxpayers were one business and their turnovers should be combined for VAT purposes. The effect of combining turnovers was that the combined business should have been registered for VAT.
The taxpayers argued that they were independent, and the Tribunal agreed. The businesses were independent within the tests given by the CJEU and were not sufficiently “closely bound to one another by financial, economic and organisational links” (Article 11, The Principal VAT Directive). There were a variety of differences in the way the two hairdressers were operated which indicated to the judge that the businesses were independent, despite the common facilities which were considered to be “organisational matters arranged for convenience”.
Businesses which are at risk of being combined for VAT purposes should review whether they are independent of one another, planning ahead and making adjustments where required. Consideration should also be given by businesses which have already been combined by HMRC under the disaggregation rules to whether they have always been genuinely independent businesses.
For further information and help on VAT and disaggregation, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.