VAT registration ― artificial separation of business activities

Produced by Tolley

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • VAT registration ― artificial separation of business activities
  • Relevant legislation
  • HMRC policy
  • HMRC approach to dealing with potential cases of disaggregation
  • Is it a single entity?
  • Partnerships
  • Multiple entities
  • Financial, economic and organisational links
  • Financial links
  • Economic links
  • More...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

Businesses occasionally attempt to avoid VAT registering by artificially splitting their business activities in order to continue to trade one or more of their businesses under the VAT registration threshold. This guidance note provides details of HMRC policy regarding the treatment of business that artificially separate their business activities. The artificial separation of business activities is often called ‘disaggregation’. This guidance note concentrates on situations where HMRC will issue a Notice of Direction (NoD) that the businesses should be treated as a single business for VAT registration purposes. However it should be noted that HMRC can retrospectively challenge whether two businesses should be treated as a single business for VAT purposes without issuing a direction, if it considers that the business activities have been artificially separated in order to avoid registering for VAT.

Relevant legislation

The legislation states the following:

“1A(1) - Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

2 - In determining for the purposes of subparagraph 1A above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic or organisational links.”

VATA 1994, Sch 1, para 1A; FA 1997, s 31; VATDSAG05000

HMRC policy

HMRC has issued a Statement of Practice regarding the action that it will take if it considers that

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