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When you ‘disaggregate’ something, you split it up into different parts or components, such as breaking a company into distinct and independent parts that can function on their own.

In many cases this is a perfectly legitimate decision, making it easier to manage a business which is growing into different areas of interest, but some owners will disaggregate (or ‘artificially separate’) a business as a way of keeping each separate part under the VAT registration threshold.

While this sounds like a clever, tax-efficient way to run your business, HMRC sees this artificial separation as a form of tax avoidance. The good news is there are valid reasons to split your business, which HMRC would find acceptable. You just need to prove the reasoning – which we’ll discuss in this article.
 

What is the VAT registration threshold?

Why do some businesses try to avoid registering for VAT?

Can I split my business into two for other reasons?

If your business has a taxable turnover of £85,000 per year or more, you’ll need to register it for VAT. Short for Value Added Tax, VAT is a sales tax which VAT registered business owners add onto the sale of eligible products and services.

Some businesses and services are exempt from VAT, for example, fundraising events run by charities or services from doctors and dentists.

Some business owners will set out to artificially separate an existing business into two or more separate businesses as a way to distribute their earnings so that they can avoid surpassing the VAT registration threshold (currently £85,000 for the 2023/24 tax year). If this threshold is not surpassed, businesses can avoid VAT registration and potentially gain a competitive edge.

But why?

Competitive edge

Adding VAT to sales makes your products or services seem more expensive, which in turn can make them less appealing to clients and customers – impacting on turnover.

For example,

Let’s say you have a beauty store that sells cosmetics and perfume. You’ve grown as a business, and your taxable sales are over the VAT threshold, meaning most of your goods are now subject to the standard rate of 20%. Suddenly, a perfume costing £20 retails for £24.

This might be enough to put off some customers, but if you deal with other businesses that aren’t VAT registered, they won’t be able to reclaim any of the added VAT back. This can have a big impact on their income and force them to look elsewhere.

Some businesses offer their customers discount codes before increasing the prices, alerting them about the changes and why they’re happening so there are no surprises!

Submitting MTD VAT returns

Another aspect of VAT registration that tends to put people off is the idea of any extra admin.

VAT registered businesses are subject to Making Tax Digital (MTD) VAT rules, and must keep digital records of all their business transactions as well as making VAT submissions to HMRC throughout the year.

It might seem daunting, but if you use good bookkeeping software, you’ll be able to keep track of this stuff much more easily. Given both points, it makes sense that artificially splitting a business might be tempting, but as far as HMRC are concerned, it’s fraud.
 

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To split your business in two (or more) parts, you’ll need to prove there’s a legitimate reason for it. This means HMRC needs sufficient evidence from you that there’s no financial, economic, or organisational link between the separate parts.

For example, if you’ve split your business then HMRC may check whether the new structures:

To ensure your business is split properly for HMRC, you need to:

There are some clear, distinct reasons to have two different businesses, such as a scaffolder who decides they also want to open their own bakery. It’s clear the businesses have nothing to do with one another, and that they’re not looking to avoid VAT by separating.

It’s more likely to be a lot less clear cut than this though and it’s well worth chatting to an accountant or advisor to make sure you’re making the best decision. Always ensure you have evidence to prove there’s validity in why you’ve split your business – and remember, avoiding VAT is most definitely not a reason.
 
If you have any questions about disaggregation or need help with VAT, talk to one of the team on 020 3355 4047, or get an instant quote online.

About The Author

Rachael Johnston

A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people! Learn more about Rachael.

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