Disaggregation is when business owners seek to avoid charging VAT by splitting their business into different parts to ensure each operates under the VAT registration threshold. For a limited company, some business owners may look to establish separate companies. A sole trader may seek to establish separate trades.
By setting up two businesses, business owners believe they can allocate their revenue across different businesses to ensure they do not exceed the VAT registration threshold. This is £85,000 in the 2023/24 tax year for an individual business (it’s been the same since 2018).
If the threshold is not exceeded, businesses don’t need to register for VAT and may have a competitive advantage.
HMRC believes this practice qualifies as tax avoidance and has set specific rules designed to ensure only legitimate ‘business splitting’ occurs. This means you must prove there is no ‘financial, economic or organisational’ link between your businesses.
If you can’t provide strong evidence there are no such links, HMRC can impose penalties and/or prosecute you.
Examples of the links HMRC look for when deciding whether businesses are related or not are shown below:
Criteria for Business Splitting to Work, first, each split business must be in a separate legal entity, eg:
• Sole trader and company
• Two companies
• Sole trader and partnership
• Studio and a number of contractors
Situations where Business Splitting may be of use
• If you run both classes and retreats – splitting these into separate entities so that one or both are below the VAT thresholds
• If you run both classes and teacher trainings – splitting these into separate entities so that one or both are below the VAT thresholds
• If you run a studio with a secondary income like a cafe or retail – splitting these into separate entities so that one or both are below the VAT thresholds
• If you run a studio which is predominantly used by yourself but others rent facilities – splitting the rentals out so they are not aggregated with your turnover
• If you run a studio and also host a teacher training
And situations where Business Splitting wouldn’t work
• Having different retreats in different entities – if your overall retreat income is over the VAT threshold
• If you run a studio and split class income across entities, eg one entity does classes for one block of teachers, and one for another
• Splitting regular classes you run at different locations into separate entities
• Aggressive tax avoidance schemes, eg separate entities for days of the week or months – this sounds absurd but it has been tried
Ensuring you have as much separation of resources and clearly defined ‘lines’ between the two businesses is key.
Another way is that you could run the businesses as different ‘entities’. For example, one business as a Limited Company, the other one as a Sole Trader.
Ultimately though, if you can’t legitimately do this, and/or it makes commercial sense to continue running as one business, you need to VAT register.