How to avoid VAT / Can I split my business for VAT?
HOW TO AVOID VAT / Can I split my business for VAT? / Pub Tax Tips – True and False
This is part of our new ‘Pub Tax’ series. How to avoid VAT / Can I split my business into two (or more) to avoid VAT?
Why split your business for VAT?
Firstly, let’s look at why this is even a question that Dave at the pub asks his mate. To avoid paying VAT! It’s that simple. Dave thinks that if he splits his business into two ‘different’ businesses that he won’t need to register and pay VAT.
When do you need to register for VAT?
If your turnover (sales/revenue) reaches £85,000 in any 12-month rolling period and you make vatable supplies then you must register for VAT. This is known as a compulsory VAT registration. There are some circumstances where it may be beneficial to voluntarily register for VAT (for example where your customers are all VAT registered businesses themselves).
Why would you want to avoid VAT?
Simply put, if your customers are not VAT registered businesses then your prices will be more expensive if you add VAT on. For example, if you previously sold pizzas for £10, as a VAT registered business you must pay HMRC 20% VAT on your sales, so to suddenly increase your prices to £12 per pizza will have an impact on the volume of your sales. In practice to manage this change you are more likely to only increase the selling price by say 10% and absorb the rest of the VAT yourself. So you may charge £11 for the pizzas which now represents 120%. The VAT on this will be 20/120 = £1.83 making the actual selling price £9.17+VAT.
So is this pub tax tip true or not?
Generally no it is not true! If you are splitting a business artificially for the sole purpose to avoid registering or paying for VAT then this will be seen as VAT fraud by HMRC.
When can I legally avoid VAT by splitting my business to avoid VAT registration?
If you have a completely different business activity from the main business then generally it will not be included as part of your annual VAT sales threshold. Let’s say Dave is a builder and he decides to also make and sell cupcakes. This is nothing to do with building services so you are clearly not trying to avoid VAT by splitting the business.
Further reading on artificial VAT separation
If you would like to learn more about this potentially complex area of UK tax law you can do so from this link.
We also have VAT calculator to help you calculate the impact of charging VAT.