As a business owner, you might have completely legitimate reasons for splitting your business operations. For instance, if your limited company sells products, and you want to focus on a niche area. This might mean you decide to sell some of those products as a sole trader instead.
Unfortunately, some companies artificially separate their businesses in order to avoid tax. It means that HMRC may suspect your motives unless you have a good reason for splitting the business.
What do HMRC consider to be an artificially separated company?
HMRC are likely to suspect artificial separation when the businesses still share financial, organisational and economic links.
Both businesses use the same bank account.
A common business profit, or financial interest that benefits both businesses.
Financial dependency on one another.
Common employees and/or managers between the businesses.
Operating from the same offices
HMRC will challenge a business which satisfies one point from each section, though more points means a stronger case.
Other factors which HMRC consider in artificial separations
HMRC will also look at instances where:
the businesses are split, but still operate under the appearance of being a single business.
the same person controls a number of businesses which make the same type of supply, and the businesses supply both VAT registered and unregistered customers.
How to ensure that your businesses aren’t artificially separated
If you operate multiple businesses separately it’s important that this is for legitimate reasons, and you can demonstrate their independence from one another. You may need to prove that the reason for their separation is solely commercial.
You can do this by making sure the companies have separate business bank accounts, individually recorded invoices, and separate accounts at year end. You’ll need to file these separately!