Running Two Leisure Businesses And VAT
Summary of Key Points
- It is very often desirable in the leisure sector to run two businesses separately to save on VAT.
- If you do this, beware of the HMRC rules on artificial splitting.
- Maintain the separation of the different businesses in as many ways as possible.
- Avoid running the businesses in ways which make them appear to be the same business.
It is very often the case in the leisure sector that owners run more than one business in tandem. For example:
- A pub or hotel provides accommodation for outdoor activity tourists.
- A pub or hotel sets up its own brewery.
- A hotel or B&B owner also runs a furnished holiday let.
Where the new or smaller venture has sales below the VAT threshold, it is desirable to keep that business outside of VAT and so save up to £10,000 or so per year. Done properly, this is perfectly legitimate and delivers the VAT saving at low cost.
The Key Question
The following question is the key one considered in the VAT Tribunals:
“Are the businesses closely bound by financial, economic and organisational links?”
Separation of structure has also featured in cases.
- Are the businesses operating independent of financial support from one to the other?
- Would they both be financially viable without support from one another?
- Have they got separate pools of income, distinct from one another?
- Are the two businesses seeking to realise separate economic objectives?
- Is there no mutual benefit to each business from the activities of the other?
- Are they supplying different customers? (and not simply VAT-registered versus not-registered customers)
- Are there two separate legal entities?
- Is there a genuine commercial reason for the separate businesses?
- Do the businesses have separate management?
- Do they have separate employees?
- Are there separate bank accounts?
- Are separate year-end accounts being prepared?
- Is there separate advertising and marketing?
- Are there separate phone numbers, e-mails, trading styles, logos, signage?
- Are there separate premises - or at least separate floor space usage?
Overall, the one way to virtually guarantee that the new venture passes most of these tests is to run it within a new limited company, separate from the main business.