HMRC says I've split my business to avoid VAT, what now?

HMRC's disaggregation rule targets businesses it believes were split up purely to keep each part under the VAT registration threshold.

Common examples include two companies running the same café at different times of day, or a husband and wife each running half of what was previously a single trade, with shared premises, staff or equipment.

If HMRC issues a direction, it treats the separate businesses as one for VAT purposes from a date it specifies, which can mean an immediate and sometimes backdated VAT liability.

Paragraph 2, Schedule 1 VATA 1994 gives HMRC power to direct that separate legal persons be treated as a single taxable person, where it considers the separation is artificial and its main purpose is avoiding VAT registration.

HMRC looks at financial, economic and organisational links: shared bank accounts, shared premises, shared staff, common pricing, and whether customers experience the businesses as one operation.

A direction generally takes effect from the date it's given, but genuine commercial substance behind the separation is your main defence. If the businesses operate independently with separate risk, separate customers and separate management, the direction is harder for HMRC to sustain.

If you run more than one company, or a company alongside a sole trade, with any overlap in premises, staff or customers, this rule is worth understanding before HMRC ever raises it.

A direction can mean sudden compulsory registration for the combined turnover, VAT due on past sales you never charged VAT on, and the administrative burden of untangling shared costs between entities for VAT purposes going forward.

Directors facing this should gather evidence of genuine separation early: distinct contracts, separate accounting, independent decision-making and real commercial reasons for the structure, not just tax ones.

If the direction stands, you face VAT on the combined turnover from the effective date, potentially with failure to notify penalties under Schedule 41 Finance Act 2008 if registration should have happened earlier.

Professional fees to defend a disaggregation case can be significant, since it usually involves detailed evidence-gathering about how the businesses actually operate.

Growth plan clients get free tax investigation insurance included, which can cover the professional costs of contesting a disaggregation direction. See /fees for details.

Don't share a bank account, till, or staff rota between businesses you want treated as separate; this is exactly the evidence HMRC looks for.

Don't assume separate companies automatically mean separate VAT registrations. Legal separation alone doesn't defeat a disaggregation direction if the economic reality is one business.

Don't respond to HMRC's questions without first mapping out the genuine commercial reasons for your structure. Vague or inconsistent answers strengthen HMRC's case.