They are run more or less independently but under one limited company. At her request I produce monthly accounts for both cafe's. A couple of months ago the Company became liable for VAT and duly registered.
Following a thread that was on accountingweb (if I understand it correctly) it is the Company that is registered for VAT, not the individual, so two different Ltd Co's would be treated differently for VAT, even if they have the same shareholder/Director and operate a similar business.
So my question is, can she set up a new Ltd Co and have the other cafe in that, and thus de-register for VAT?
I am aware of falsely using disagregation to evade VAT but in these circumstances had two limited Companies been set up in the first place VAT would not have applied (Both cafe's individually under the threshold)
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
I think where you are going wrong here is the assumption that things would have been different had it been two limited companies.
The two are under the same control so disagregation the way that you are relaying it is really artificial seperation and HMRC would look at the similar businesses in agregate regardless as to when the businesses were set up.
Fact is that there are two businesses under the same control doing the same thing. Seperation for VAT purposes is a sham... But there are reasons for seperation (see below) but all of the businesses within the group would be liable for VAT.
As hinted at above, it is quite possible to have groups of limited companies with a single company responsible for VAT for the group. But to look at this as setting up one limited company per cafe (which has merit as it enables relatively straight forward disposals of seperable businesses as going concerns) needs to be considered for reasons other than false VAT saving.
So in answer to your question. Yes she can have a seperate limited company but because such is really artificial seperation she could not deregister for VAT but would rather need to either set up a VAT group or have them both registered for VAT even if they are both under the limit individually.
Now, I'm pretty sure that this one should spark a debate as it can be quite a contentious area.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
To be honest Shaun, I thought it was as you describe, but in the thread, it was strongly hinted that it could be done, so that set me off thinking. (Actually apologies, it was sole trader and one ltd co)
It is highly likely that the VAT will wipe out this clients profit, so obviously if there was a legitimate way to avoid paying the VAT, it was going to make me sit up and take notice.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
If you have two sites (preferably with two different names) which have to be licensed/insured separately, and have their own assets, I don't see why two companies cant be formed. It could form protection if one cafe went into liquidation - protects the second cafe's assets. That's a reasonable excuse for separation. The association shouldn't cause the issue, as they are still separate entities. If say one company had one shareholder, and the other company had two... they cant be forced to both register for VAT, as the structure is different.
But lets say its same one shareholder in both - If HMRC decided that the trades are part of the same business, they can force the two companies to be combined for VAT purposes. But, as I understand it, they cant do it retrospectively, only going forward from that point
Sorry John.. I've misread, I had it in my mind that there was a company and a sole trader, and the sole trader wanted to incorporate! Sorry its been a long day! But my post should help anyone in that situation!!
I would think that to separate one cafe out of the accounts would be a bit of a pain... one company selling to the other? So VAT aside, it could get costly and messy!
-- Edited by FoxAccountancyServices on Tuesday 27th of October 2015 11:50:55 PM
depends if they felt that he seperation was done for the purpose of evasion Michelle.
If no suspicion exists then they would issue a direction which as you say is not applied retrospectively. The key is that the businesses must be run seperately to warrant a direction. If they have been run together then its more a more serious matter.
As covered a little in my previous post, we're in agreement over the creation of multiple companies although the reasoning for that from my perspective is to be able to sell off the parts more easily.
I think that liquidation is a dangerous example as if creditors can show that the business was being run down to the benefit of the remaining business, basically harvesting it, then they could seek to have the veil removed (which the owner may have effectively done by abandoning their fiduciary duty of care).
On the shareholders front thats another misnomer I think as the real test is one of control, not simply ownership. Its a bit late tonight to go digging out the case law around this but if I get time tomorrow I'll see what I can dig up as I remember that this was a very hot topic post Enron.
Lol, just realised that I'm comparing a couple of cafe's to one of the biggest financial collapses of all time.
p.s. this was responding to your first post.
-- Edited by Shamus on Wednesday 28th of October 2015 12:03:41 AM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Your first reply was quite informative Michelle, so although it doesn't apply in this case, it's useful in itself.
Hi Joanne, if it was deliberate separation, I would say it was. If it ever cropped up with any of my clients, I would point it out, and if they weren't prepared to adjust to the correct position, I would report.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Every large company in the world, sets its stall out so it can avoid tax.. or rather... put itself in the best tax situation. There is no reason a small business can't do the same kind of planning. Anything can be achieved, if it's done right - the large companies prove that to us every day! Its just never worth the cost, for a smaller business.
The comment on veil of incorporation is interesting, and gives me some wonderings (I love wonderings, it makes me learn!)... Usually I'm thinking that its the directors personal assets that can be seized, such as house, car etc etc. Could the courts go after company B's assets, if company A went bump? Or, would it have to go after the directors other personal assets? What if there are two shareholders in company B, one of whom has nothing to do with company A? (Thinking about it, if sole trader went bump, could courts go after company assets?) (This interests me because I have seen a company be set up to lease assets to another company, so that if the trading company has a big lawsuit for negligent work, the assets are safe in the leasing company. I wasn't heavily involved in that, I was just an audit assistant, so not not sure how the structures were set up, but I think two director/shareholders were named on both - whether there was others, I don't know, I didn't work on the leasing company)
If the one shareholder company was to sell off one cafe to a two shareholder company, because a new investor wasn't interested in being involved with both sites, surely that would be grounds for separation? I mean, as I say above, selling off one half will just get costly and expensive, as it would have to be done properly, with agreements and payments etc - and I even wonder if, from the comment above - as a VAT reg business, does selling half a business, mean its a part transfer of a going concern (and so must, at least, be registered for VAT at first, until it can prove it falls below the dereg threshold.) Can it de-register after a time?
Wow this is a great question John. I love stuff like this!!
-- Edited by FoxAccountancyServices on Wednesday 28th of October 2015 01:10:17 AM
have to say that there is one very big reaso why small companies cannot do the same.... Money.
Big business have large legal and accounting departments of the very best of the best on Payroll. They wield resources that the small business owner, even one's with legal cover, could only ever dream of.
If HMRC attempt to take them on then HMRC know that they will be in for a fight which could drag through the courts for years and cost the treasury millions with no guarantee of a win... And winning can be a bit of a sword of damaclese in such instances
By comparrison if HMRC take on a small business its easy money for them.
The scenario that you are pondering is similar to Pheonix companies where company A is run down, company B acquires their assets for next to nothing (or nothing), real control remains the same but the owners walk away from company A's debts.
Whilst Phoenix companies in themselves are not illegal, their misuse to avoid payiong creditors would involve contacting the Serious Fraud office. But, as you say, whilst the director will be banned from being a director, lose everything and possibly do jail time what happens about the assets that have gone to the seperate legal entity.
The answer there lies in that the director was acting illegally so the liquidator of company (a) would not so much go after the assets of company (b) but rather have the transactions annulled as illegal so ownership never really transferred to the new company but rather remained assets of company (a).
Thats not really going after company (b) as such but rather rendering its position in matters null and void with the assets of company (a) being seized (even though they were deemed to belong to company (b)) as well as the directors personal assets.
As you say, an interesting question.
No time to ponder the third part of your question at the moment but hope to come back to it later this afternoon.
Have a good one.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Shaun, very much agree that HMRC go after easy targets.. much like the CSA!
That's some interesting information, thank you. I think assets were purchased by the leasing company (A), and any assets transferred from trading company (B) were at current MV. Company B continues to be very successful, 15 years on. Could the transferred assets be nulled, in that case?
I look forward to hearing your thoughts on the rest!
the time lapse between the two in your scenario is way too long to worry about the transfers being annulled. Such would only be for a reasonable time where creditors could potentially chase the debt.
Legally thats 6 years for unsecured debts (12 for mortgages) but personally I think that it would be quite unusual circumstances for a creditor to start procedings after more than 2 years.
On the second question there are a lot of variables involved such as are the two limited companies regarded as being part of a group or seperate? Even if control can be argued there is still significant influence as indicated by shared key management / ownership.
Lets take the more interesting question that the two companies are part of a group. You can have group registration and remove companies from the group as required (i.e. when you sell them).
This is not something I've done myself except for a question that came up in my advanced tax exam so better to get the detail from the horses mouth here (see especially section 6) :
If the businesses are incorporated seperately but run as a group does that not make the sale of one of the incorporated entities a full transfer as a going concern as you have actually sold the entire business not merely a significant element of it?
In itself that would be my argument for seperate incorporation of each unit. Run each totally seperately and divest the poorest performing entities of the group.
lol, not had this much fun since we were talking about shed's. lol.
And people call accountants boring! Tut. They just don't appreciate this edge of your seat stuff.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
