VAT CASES - 28.11.2019

Business splitting was effective

The case. The taxpayer (H) ran a café as a sole trader, with annual sales below the VAT registration limit. His wife (W) ran a restaurant on the same premises, also as a sole trader with sales below the registration limit. HMRC claimed that H owned both businesses, with a combined turnover that exceeded the threshold between 2009 and 2016.

Factors that HMRC said indicated there was only one business were as follows: there was a single website and H bizarrely admitted to HMRC in a questionnaire that he owned the restaurant and his wife was an employee. All card payments for both businesses were banked into H’s account. However, there was no doubt that W controlled the menu in the restaurant and each business had separate tills and staff.

The law. If two businesses have been artificially split to avoid VAT, then HMRC has the power to issue a direction from a current or future date to treat the two entities as one business. It can do this if the businesses have organisational, economic and financial links. But in cases where HMRC decides there has not been a proper split, and a single trading entity, it has the power to seek retrospective registration going back up to 20 years.

The decision. The key issue that persuaded the First-tier Tribunal (FTT) in favour of the taxpayer was that there was a clear intention on the part of the owners to run separate entities. The appeal was allowed.

Key points. The FTT accepted that in a husband and wife trading arrangement, there will always be some overlap between the businesses. The judge looked at the bigger picture of what the couple were trying to do. There was a similar husband and wife victory in the courts some years ago, the case of hairdresser Graham Belcher. Despite these victories, it is still better for splitting arrangements to be done properly in the first place, with all issues kept at arm’s length and on a normal commercial basis. This reduces the risk of a challenge from HMRC.

C. Caton v HMRC [2019] TC07343

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