Hopefully someone can advise here and hopefully I can make the scenario clear.
It is my understanding that you cannot split up a business into two or more businesses which are related (in terms of what they do) in order to avoid VAT registration. I assume that it doesn't really matter whether these businesses are sole traders or limited companies. My question relates to a sole trader who operates happily below the VAT registration level (well maybe happily is not the correct word!) but carries on two or more different trades. These trades are not really split up in terms of trading names (the sole trader just goes by their name).
One of the trades/activities has just won a contract for services for the next couple of years and the amounts involved as a stand alone business would take the business close to or over the VAT registration threshold. Say the contract is worth around £150K over the next two years (which may well mean breaking through the threshold in one 12 month period). I have a couple of questions :-
1/ Does the individual have to do anything in terms of informing HMRC of this new activity - especially if they start to operate under a new trading name or just consider them separate activities 'internally' especially when thinking about VAT. Should the individual create a separate trading name?
2/ It sounds likely that this new trade will need to register for VAT on it's own merits, but what if one day one a signed contract showed that the future income will be greater than the VAT threshold is there any obligation to register immediately? And since the trade is not going to continue after the contracted period, is there a mechanism for NOT registering at all??
You have to be careful with disaggregation rules. However if the new contract is for a different type of activity/trade then separating this via a limited company would not be disaggregation since it would be a new activity. If deciding this was the best route, clear delineation between the two businesses would need to be made, e.g. if operating from the same location I would suggest one business invoices the other for rent, same goes for any shared equipment/staff. As much as possible in writing to show the businesses are separate.
If all coming under the same business then I'm not aware that HMRC need to be told of the extra activity but I may be wrong since nowadays on the registration you have to indicate the SIC, however if using FRS then the more prevalent business activity would determine the percentage used.
Is the client trading with other businesses? If so is there a problem with going vat registered, it may be better for them anyway?
The other factor you need to bear in mind is that if the sole trader operates two distinct businesses, even though they are clearly separate, he will be required to be registered if the total turnover exceeds the registration threshold (£81,000). This is because it is the person, rather than the business, which is or is not registered for VAT. So, if one business would be registrable in its own right, then you should consider, for example, two different limited companies. Such a separation probably would not be considered 'artificial.' The client should speak in the first instance to his Accountant, to ensure that all the conditions for separation are fulfilled, and he is not left vulnerable to HMRC action.
