Tag Archives: disaggregation

VAT: Disaggregation – The Caton case

By   12 September 2019
0

Latest from the courts.

In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).

Background 

The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.

HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.

The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.

The Law

The VAT Act 1994, Schedule 1 para 1A provides that:

(1)  Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

VAT Act 1994, Schedule 1 para 2 provides that:

(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…

Decision

The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.

Commentary

These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.

If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.

VAT Splitting a business to avoid registration: Disaggregation

By   8 December 2016
0
I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT – Splitting a business to avoid registration doesn’t work

By   30 January 2015
0

I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  •  common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.