There’s this persistent myth floating around business circles: “If I split my operation into two companies, I can stay under the VAT threshold forever.” Sounds clever in theory. In practice? HMRC spotted this trick decades ago and they’re not impressed when people try it.
How the “clever” plan works
Picture this: your business is nudging toward that £90,000 VAT registration threshold. So you get creative. Set up another company in your partner’s name, or create a separate limited company, and split your income between them. Brilliant, right? Neither business hits the threshold individually, so you dodge the VAT registration, the 20% charges, and all that quarterly return paperwork. Except HMRC didn’t fall off the back of a turnip truck.
Why this may backfire
HMRC treats artificially split businesses as exactly what they are – one business pretending to be two. If they catch you, the consequences aren’t pretty. They’ll aggregate all the turnover from your “separate” businesses, apply penalties and interest backdated to when you should have registered, and probably take a much closer look at the rest of your tax affairs while they’re at it. The penalties alone often cost more than just registering for VAT in the first place.
What actually counts as one business?
HMRC isn’t guessing here. They have specific tests they apply:
Do you share customers between the businesses? Same premises, branding, or marketing? Using the same equipment or staff? Are the businesses financially connected – maybe one funds the other? Do they depend on each other to deliver services? Answer yes to several of these and HMRC will treat it as one business for VAT purposes, regardless of how many separate legal entities you’ve created. The key word here is “artificially.” If you genuinely run two completely different businesses that happen to be owned by the same person, that’s different. But most attempts at VAT splitting don’t pass this test.
What smart businesses do instead
Rather than playing games with business structures, successful businesses plan for VAT registration properly:
Price it in from the start: Build your pricing strategy assuming you’ll eventually be VAT registered. That way it’s not a shock to your cash flow when it happens.
Consider the flat rate scheme: Depending on your business type, this can actually be more profitable than trying to avoid VAT altogether.
Think about genuine diversification: If you’re legitimately expanding into different sectors with different customers, systems, and operations, that might justify separate businesses. But do it for business reasons, not tax reasons.
Get professional advice early: A good accountant will help you plan for VAT registration rather than trying to avoid it artificially.
The reality check
Here’s what most businesses discover: VAT registration isn’t the nightmare they thought it would be. Yes, there’s more admin. But you’re also running a business that’s generating £90,000+ in turnover – that’s worth celebrating, not hiding from. The businesses that thrive long-term are the ones that embrace growth and the responsibilities that come with it, rather than trying to stay artificially small through questionable structuring.
HMRC’s message is clear: they’d rather you register properly than try to be clever. And frankly, so should you. The penalties for getting this wrong far outweigh the benefits of getting it right. Better to plan for legitimate growth than risk an expensive lesson in tax avoidance gone wrong.
