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Artificially separating a company splits it into two separate businesses so that the turnover of each is below the VAT registration threshold.

Can I split my business into separate operations?

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.

 

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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.

Financial links Organisational links 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.
  • Sharing equipment
  • Operating from the same offices
  • Sharing advertisements

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:

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!

Talk to one of our team by calling 020 3355 4047, or ask for an instant quote for our online accounting services

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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