A business must register for VAT when its turnover for the last 12 months exceeds £85,000. It must also look forward and judge if its turnover in the next 30 days alone will exceed £85,000. This threshold has been frozen since 1 April 2017, and it will remain at that level until at least 1 April 2022. This means that more businesses will be drawn into the VAT net simply by increasing their prices by inflation every year.
If you don’t want to register for VAT, you either have to keep your total sales low by working fewer hours, or consider splitting your business into two entities which each have a turnover of less than £85,000. Business splitting is legal but HMRC will pursue cases where they believe the split is artificial.
You can only effectively split the business if you have separate products or services which you could deliver from different legal entities. It helps if the separate products are bought by different groups of customers. For example, cleaning commercial buildings for business customers and cleaning domestic premises for non-business customers.
Step 1: Set up two legal entities to deliver your two strands of business, such as a company for the commercial cleaning, and a partnership or sole tradership for the domestic cleaning. You can effectively control both entities.
Step 2: Split the back-office support for the two businesses to ensure HMRC sees that two businesses exist in practice. You will need to set up separate bank accounts and insurance for each entity. Also purchase supplies through distinct orders in the name of each business, and make sure the correct business bank account is used to pay for the goods acquired. Bank the sales income in the correct bank account for each business.
Step 3: Split the cost of commonly used assets. If both businesses operate from the same address, set up a formal lease so that one business sublets part of the area to the other entity. Where some employees work for both businesses, the costs should be charged from the main employer to the other business.
We can help you split your business, but the costs will require continuous monitoring.