Can You Split a Business to Avoid VAT? Yes… But Here’s the Catch

What on earth is VAT disaggregation?

Ever thought, “what if I split my business into two to dodge the VAT registration threshold?” That’s VAT disaggregation (or "artificial separation") and yes, HMRC is on to it.

In simple terms, it’s when one “business” masquerades as two (or more) to stay below the VAT radar.

Why some entrepreneurs take the plunge

VAT adds 20% to your prices. Suddenly your £100 widget hits the market at £120.

That extra sting can make customers run for the hills, especially when they're not VAT-registered themselves and can't claim VAT back.

Breaking into separate entities to keep your turnover below the VAT limit seems like a trick, but can get messy, fast.

When splitting is legit

You can lawfully separate activities; for instance, a property developer trading taxable supplies and a lettings business offering exempt rentals.

But HMRC may grill you on whether there’s financial, economic, or organisational overlap.

Watchpoints include:

Shared bank accounts
Common staff, offices, equipment
Cross-promotion or joint marketing
Personnel managing both entities

If all that exists, HMRC will likely treat it as one business and slap combined VAT liability, backdated penalties, and potentially more.

Real‑life examples of VAT disaggregation

A couple ran a hair salon and a beauty parlour in the same shop under different names and bank accounts but shared stylists. HMRC said no.

A pub owner tried splitting bar and catering under separate entities even though menus and staff overlapped. HMRC said nope.

Success story: a proper split

Meet Jane, she runs a residential lettings company (VAT‑exempt) and a commercial property development firm (VAT‑taxable).

Different premises, separate teams, no shared resources.

HMRC gave the thumbs‑up, disaggregation didn’t apply here

What HMRC can do

If HMRC concludes it’s artificial separation:

They can issue a Notice of Direction to treat it as a single taxable entity (Schedule 1 VAT Act 1994).
They can backdate VAT registration. The standard look-back window for late VAT registration is up to 4 years. However, in cases of deliberate fraud or evasion, HMRC can go back up to 20 years!
They can impose Failure to Notify penalties ranging from 10%-100% of unpaid VAT.

So, that “clever” move could cost tens of thousands.

How to (Legally) Separate Your Business for VAT

Area	What You Should Do	Why It Matters
Legal Structure	Set up separate legal entities	Different legal status is the foundation of separation
Separate VAT Registration	Register each entity individually	Gives each entity a distinct tax identity
Business Names	Use unique trading names and branding	Avoids customer and HMRC confusion
Bank Accounts	Keep separate accounts for each business	Critical to show financial independence
Bookkeeping	Use different software & ledgers	Prevents overlap in audit trails
Premises	Operate from different locations	Helps prove economic separation
Staff	Hire different employees for each business	Supports organisational independence
Marketing	Separate websites, socials & campaigns	Avoids perceived overlap or shared identity
Client Contracts	Each business signs its own contracts	Proves commercial separation
Insurance	Maintain separate insurance policies	Confirms legal and operational separation
Revenue Streams	Avoid cross‑charging below market rate	Prevents artificial manipulation claims
Equipment	Use separate tools & tech	Avoids shared economic purpose
Contact Details	Unique phone numbers and emails	Reduces confusion for HMRC & clients
Internal Policies	Document how operations differ	Shows separation intent and execution
Commercial Logic	Split must serve a business purpose	Lack of logic = red flag
Shared Branding	Avoid appearing as part of the same group	Strengthens brand independence
Management	Separate directors or management roles	Avoids organisational overlap
Documentation	Keep records justifying split	Critical in an HMRC challenge
Timing	Split should align with growth, not avoidance	Poor timing raises suspicion
Customers	Have different customers for each entity	Proves commercial separation

Our legal take

According to VAT law (VATA 1994, Sch 1, para 1A(2)), HMRC only needs to prove the different entities were "closely bound to one another" by financial, economic and organisational links to prove disaggregation.

They don’t need to prove that there was any intent to avoid VAT!

So leaving any one link in place is risky business.

Final word for business owners

VAT disaggregation is not a loophole.

✅ If splitting reflects true business strategy, you might be fine.
❌ If it’s just a dodge to avoid VAT, it's a red flag.

Make sure your structure proves independence in every sense. Stamp it with evidence and if you're uncertain talk to professionals like us at SCCS Accountants.

Bottom line

VAT disaggregation may look clever but it’s risky if your entities aren’t truly separate.

Ensure no shared bank, premises, staff, equipment, or marketing, and have commercial logic to back it up. Because if HMRC wants to merge you back together, you’ll wish you’d been prepared.

Need help untangling your VAT structure?

Contact us for expert advice, tailored to your setup (and VAT-compliant all the way).

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Disclaimer

This article is provided for general informational purposes only and does not constitute tax, legal, or financial advice. VAT rules are complex and subject to change. We do not accept any liability for actions taken based on the content of this guide. Before making any decisions or changes to your business structure, please seek tailored advice by contacting SCCS Accountants directly.