Splitting your business to avoid VAT: what are the rules?
Splitting a business into two or more parts to keep each below the VAT registration threshold might sound straightforward. But if the separation is artificial and results in VAT avoidance, HMRC can challenge it.
This is known as artificial disaggregation.
There are legitimate reasons to operate separate businesses. The question is whether they are genuinely separate in practice, rather than simply on paper.
What is disaggregation?
The current UK VAT registration threshold is £90,000 of taxable turnover.
For a UK-established business, registration is normally required when taxable turnover exceeds £90,000 over a rolling 12-month period, or when you expect it to exceed £90,000 in the next 30 days alone. It is not simply measured against your financial year.
Taxable turnover includes standard-rated, reduced-rated and zero-rated sales. Exempt sales are generally excluded.
An owner might try to divide a business generating £140,000 of taxable turnover into two businesses generating £70,000 each. If that division is artificial and avoids VAT registration, HMRC may direct that the activities are treated as those of a single taxable person.
HMRC does not have to prove that avoiding VAT was the owner’s intention. The artificial separation and its effect are what matter.
Why do it?
VAT registration can put pressure on margins, particularly for businesses selling to consumers who cannot reclaim VAT.
If a business keeps its customer price at £100 after registering, and the sale attracts VAT at 20%, £16.67 of that £100 is output VAT.
However, that is not necessarily the amount payable to HMRC. The business may also be entitled to reclaim VAT on eligible purchases and expenses. The actual impact depends on its sales, costs and VAT recovery position.
That potential pressure can tempt owners to split activities to stay below the threshold.
What might a split look like?
Examples include:
By location: operating different branches through separate entities.
By service: separating a pub’s drinks sales from its catering operation.
By sales channel: dividing an existing shop’s online and in-store sales.
By time: having different entities operate the same business on different days.
These arrangements are not automatically artificial. HMRC considers the facts of each case.
Can I operate more than one business?
Yes. But running several activities does not necessarily give you several VAT registration thresholds.
For example, if you operate multiple trades as the same sole trader, the taxable turnover of those activities normally counts together. Different trading names do not create separate legal entities.
Where separate legal entities exist, HMRC can still consider whether the separation is artificial. Its guidance distinguishes between activities carried on by one legal entity, artificially separated activities, and genuinely separate businesses.
What does HMRC look at?
HMRC considers how closely the parties are connected through financial, economic and organisational links.
Financial links
Does one business financially support another?
Could each operate without that support?
Is there a shared financial interest in the proceeds?
Economic links
Do the businesses pursue the same commercial objective?
Do their activities benefit one another?
Do they serve the same customer base?
Organisational links
Do they share management or employees?
Do they use the same premises or equipment?
HMRC considers these factors together. A shared resource does not, by itself, settle the position.
What about separate bank accounts and records?
Separate accounts, records, contracts and invoices can help demonstrate how businesses operate. But they do not guarantee that HMRC will accept the separation.
The underlying commercial reality matters. Can the businesses operate independently? Are dealings between them conducted on normal commercial terms? Do the documents reflect what actually happens?
HMRC’s guidance specifically considers whether the entities can operate independently and have a normal arm’s-length commercial relationship.
Should I split my business?
There may be sound commercial reasons to establish separate businesses. But creating another company or putting part of the turnover into someone else’s name does not automatically solve a VAT problem.
Before making changes, establish who supplies the customer, who controls each activity, who bears the costs and risks, and how the businesses work together.
If the proposed structure depends on presenting one integrated operation as several independent businesses, get the position reviewed before proceeding.
What are the consequences of getting it wrong?
There are two different situations to understand.
1. HMRC issues an artificial-separation direction
Where the legal conditions are met, HMRC can direct that the separated activities are treated as a single taxable person.
Registration under that direction takes effect from the date of the direction or a later date specified in it. The direction itself does not retrospectively combine the businesses for earlier periods.
2. HMRC finds that one legal entity was carrying on all the activities
If there was already one legal entity that should have registered, HMRC can require registration from the correct earlier date and recover the VAT due from that date.
A failure-to-notify penalty may also apply where a registration obligation was missed. It is not an automatic penalty of 10% to 100%.
The calculation depends on the tax at stake, the behaviour involved, the timing and circumstances of disclosure, and the help given to HMRC. Some non-deliberate cases can attract no penalty; deliberate and concealed failures can attract penalties of up to 100% of the relevant tax. A qualifying reasonable excuse can prevent a penalty for a non-deliberate failure.
Concerned about your own business structure?
Whether businesses are genuinely separate depends on how they operate in practice. Get the position checked before making changes, or if your existing arrangements concern you.
Call the Acumenica team on 03330 166559 or fill out our contact form to discuss your VAT position.
Updated 29 October 2026.
