Syllabus A6. Value Added Tax A6a. Additional Material

A6ai. Disaggregation of business activities

Syllabus A6ai)

Advise on the impact of the disaggregation of business activities for VAT purposes

Disaggregation of business activities

If a person is involved in two separate businesses then the general rule is that each business should be considered separately when determining:

  • a) The due date for VAT registration.

Each business will have its own taxable turnover considered when determining whether VAT registration is required.

Tax avoidance

  • Someone may carry on one business but purposely show it as two separate businesses to split the whole business into two small pieces and therefore the individual revenue of each business will not cross the VAT registration threshold, and registration or payment of VAT will never be required. 

    For example, a couple owns a hotel business but the wife operates the restaurant separately and the husband operates the room letting separately. 

    The taxable turnover of the restaurant is £50,000 p.a. and the taxable turnover of the room letting is £50,000 p.a. Individually, none of the businesses cross the VAT registration limit but together they do.

  • Whereas, if the revenue was added together (as it should be because it is actually one business), then VAT registration and VAT payment would be required, and therefore splitting the business into two parts is tax avoidance. 

    For example, if the above taxable turnovers were added together to £100,000 – VAT registration would be required.

Exception to the general rule

There is a provision to prevent a business from being artificially split into small units thereby avoiding VAT registration because one or more units falls below the registration limit. 

Where HMRC are satisfied that persons are carrying on separate activities which should be regarded as part of a single business then they will issue a direction that it should be treated as one business and the sales revenues from the separate units should be aggregated.

The direction will state that the persons named therein are carrying on one activity.

For example, in the above situation, the sales revenues from both activities will be aggregated when determining when the registration limit has been reached.