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VAT Registration Problems and Keeping Below the VAT Limit

The compulsory VAT registration threshold is now £64,000 for sales made in any twelve month period. If your sales are expected to top that threshold in the near future you need to apply to be registered for VAT without delay. On the VAT1 application form you need to set the commencement for your VAT registration at a date that is no more than a month after your sales reach £64,000. As it currently takes up to three months to get VAT registered, you need to be able predict your future sales quite accurately, and keep a close eye on your past sales for a rolling 12-month period.

These problems can be avoided if your sales stay just below the £64,000 threshold. Where you have one particular successful strand of your business, you may consider splitting-off that line of sales into new business to keep your core sales below the VAT threshold. However, business splitting must be done on a fully commercial basis as the VATman takes a dim view of any artificial division that is purely designed to avoid VAT registration.

A business split works best if the two new businesses are run through separate legal entities, such as a partnership and a limited company, and each services a different set of customers. For example, commercial customers buy from one business and private individuals from the other. The purchases for each business should be made completely separately, and separate accounting records and bank accounts set-up. If one business owns the premises that they both trade out of, the second business should pay a market rent for its use of the space.

The VATman can challenge a business split if he can show the separation is artificial, the two businesses are closely bound by financial, economic or organisation links, and the split results in VAT avoidance. However even if he does decide that the two businesses actually operate as one, he can only insist that they are combined for VAT purposes from the date of his decision. That may mean that both businesses must immediately become VAT registered.

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