What is Disaggregation?

Thursday, January 18, 2024

As accountants, we hear a lot of frequently asked questions, and this one is possibly in the top ten!  

Can I separate my business to remain under the VAT threshold? 

Also known as ‘disaggregation’ or ‘artificial separation’, if not done correctly and for legitimate reasons, HMRC class this as a form of tax avoidance.  

While there can be very valid reasons for splitting a business, companies must approach this decision with caution and be fully aware of HMRC’s rules. HMRC are on the lookout for businesses who chose to split their companies purely to remain under the VAT registration threshold, currently £85,000 for the 2023/24 tax year (this threshold has remained unchanged since 2018). 

Many businesses would prefer not to have to add 20% VAT to their products or services, as this makes them seem less competitive against non-VAT registered companies in their field. Becoming VAT registered is also less appealing to some organisations due to the extra paperwork and admin. Since the introduction of Making Tax Digital (MTD), VAT registered businesses are subject to MTD rules, stipulating that digital records of all business transactions must be stored and VAT submissions to HMRC must be made throughout the year.  

To legitimately split a business, you must be able to prove to HMRC that there is no financial, economic or organisational link between the businesses. You must be able to provide substantial evidence, or you could face penalties and even prosecution.  

Financial links could include a shared bank account, financial dependency on each other or financial interests that benefit both businesses. Economic connections could include the sharing of premises or equipment, or even sharing advertisements. Organisational links would usually be employees and managers whose time is shared between the two companies.   

If you do decide to split your business, HMRC will want to see: 

  • Separate bank accounts for each business, as well as separate business records 
  • Separate management, supervisors and employees for each business 
  • Both businesses must be registered independently with HMRC, and submit their own tax returns  
  • If customers use from both businesses, it must be clear that they are dealing with two separate entities 

As with all things tax related, it’s always best to consult the experts for up to date, independent advice. At Ellacott Morris our VAT gurus can help you make the right decision and manage every aspect of your VAT for you too.  

Get in touch with us today – we’re more than just accountants.  

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