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Replies to Queries - 1 - Two businesses or one?

21 August 2002
Issue: 3871 / Categories:

John is a sole trader who has built up a successful business over the last few years supplying filled baguettes, cobs and snacks from a small shop. The trade has been considerably increased recently by making deliveries of pre-ordered baguettes and cobs to offices and factories in the vicinity of the shop. The turnover is getting very close to that at which VAT registration would be required. This is clearly very undesirable because there is no scope for increasing the price of the food and, in effect, the VAT would have to be borne by John.

John is a sole trader who has built up a successful business over the last few years supplying filled baguettes, cobs and snacks from a small shop. The trade has been considerably increased recently by making deliveries of pre-ordered baguettes and cobs to offices and factories in the vicinity of the shop. The turnover is getting very close to that at which VAT registration would be required. This is clearly very undesirable because there is no scope for increasing the price of the food and, in effect, the VAT would have to be borne by John.

John is hoping to buy an adjacent shop. He will retain the present shop as a base at which the cobs and baguettes for the van sales will be made. It will no longer have a counter business. The adjacent shop will both make and sell baguettes and cobs and other snacks but will also incorporate a café and a restaurant and bar. John proposes to run the new shop through a new limited company, whilst the old business would continue in his own name. He thinks that the turnovers of the two businesses can be treated as being separate for VAT and that therefore no registration would be required.

I think that the majority of the tribunal decisions in similar circumstances have required the businesses concerned to be registered as one and for them to be liable for VAT. John has seen the tribunal's decision in R E and R L Newton (trading as R E Newton) (17222) and thinks that he can rely on that to give him authority for not registering for VAT.

Readers' opinions would be most helpful.

(Query T16,060) - Toast.

 

It is common for traders to carry on two or more businesses in separate capacities, with one or more of them staying below the VAT registration threshold. It is also common for Customs to raise assessments on the basis that there is in fact only one business and it is omitting some of its turnover from its VAT returns. 'Toast' is therefore quite correct to be concerned about this. At the very least, there is likely to be an argument with Customs at some point, and the client needs to be ready for it.

It is first crucial to recognise that there are two separate issues, which Customs officers do not always clearly distinguish. This may be partly because Customs Notice 700/61/97 itself does not clearly distinguish them. The first is whether the two businesses are in fact one from the outset, i.e. they have never been genuinely separate. Customs would then assess for back tax, interest and possibly penalties and, if they succeed, the plan has never achieved anything (except a loss).

The second issue is whether there are separate businesses as a matter of fact, but they have been 'artificially separated', and a VAT saving results. If this is the case, Customs can issue a direction under paragraph 2 of Schedule 1 to the VAT Act 1994 and treat the two businesses as a partnership from the date of the direction onwards. This at least means that the trader has made money from the plan until Customs spot it and there can be no back tax, interest or penalties under a direction.

The cases before the tribunal mainly deal with assessments, not directions. This is for two obvious reasons. An assessment is much nastier than a direction, because it is retrospective, so it is more important to argue the case; and a direction is much harder to fight against if there is any element of VAT planning in the separation of the businesses. It is probably also the case that Customs raise more assessments than directions, but that is hard to be sure about. It is not my impression that 'the majority of the tribunal decisions' have gone Customs' way on this issue - Customs raise plenty of assessments which are turned down. There is a useful review of recent cases in Taxation, 23 May 2002 at page 208 ('Separating Businesses' by Neil Warren) which bears this out.

What does come out of the tribunal cases is that Customs often raise assessments when they should issue a direction. That was the explicit comment of the chairman in the Newton case. As long as the trader 'does the thing properly', there should be no question of an assessment succeeding. This means that the businesses must clearly separate their transactions and their resources. If they use anything in common, it is essential that each bears its own share of the costs. Customers must know who they are dealing with.

The fact that one of the persons is a limited company may help - as long as the legal niceties are observed, it is harder to argue that a company is 'part of' the trade carried on by a sole trader. But Customs succeeded with the argument that the sole trader's activities were 'part of the company' in E Stringer (Paints) Ltd (16319), and 'Toast's' well-informed client should read that decision to see what he should avoid.

In summary, take care and make the separation 'real', and you should be safe from an assessment; but it will be hard to resist a direction, which Customs may raise at a later date if they become aware of the situation. You will therefore have an advantage of unknown duration. - Leyborne.

 

Tribunal decisions are not binding, so the decision in R L Newton merely gives guidance to a future tribunal. The financial, economic and organisational links between the businesses have to be considered to decide whether artificial separation has taken place. In my opinion there might well be two businesses if John runs the company and another person runs the shop and retains the profit. I would suggest that 'Toast' writes to the Tax Tribunals Office and asks for a copy of the Newton decision, which should indicate all necessary action to be taken to separate the businesses and provide reference to other relevant decisions. Copies of decisions can be a bargain at £6.

No VAT liability can arise until Customs issue a direction, if the two businesses have genuinely operated separately.

There is no doubt that the sales of pre-ordered food are standard-rated sales of catering. However, the tribunal held in Zeldaline Ltd (VTD 4388) that casual sales from a mobile van were not supplies of catering providing that there were no verbal or written agreements with the occupiers of any premises visited and no contractual agreement to supply the occupants thereof. Zero rating is thus available where applicable. If it were commercially viable to sell from stock rather than by order, this decision could be exploited. - R.N.G.

Issue: 3871 / Categories:
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