Running two companies can reduce commercial risk, separate activities, or serve different customer groups. But if those companies operate as one business in practice, HMRC may question whether the structure is artificially keeping turnover below the VAT registration threshold.
This guide explains how VAT disaggregation works. It also highlights the connections that can attract HMRC’s attention.
Key Takeaways
- Two companies do not automatically share one VAT registration threshold.
- HMRC can challenge an artificial separation that results in VAT avoidance.
- HMRC examines financial, economic, and organisational links.
- Common ownership alone does not decide the outcome.
What Is VAT Disaggregation?
VAT disaggregation occurs when separate legal entities are used to operate what HMRC considers one business.
The arrangement can result in each entity remaining below the VAT registration threshold, even though the combined activities would exceed it.
The rules appear within Schedule 1 of the Value Added Tax Act 1994. Their purpose is to prevent artificial separation from causing VAT avoidance.
HMRC does not need to prove that the owners intended to avoid VAT. However, it must show that the separation was artificial and caused VAT avoidance.
The VAT Threshold
A UK business must register when its taxable turnover exceeds £90,000 in any rolling 12-month period.
Registration may also be required when expected taxable turnover exceeds £90,000 within the next 30 days.
Taxable turnover generally includes standard-rated, reduced-rated, and zero-rated supplies. VAT-exempt and outside-the-scope activities are generally excluded.
Two genuinely separate companies normally measure their taxable turnover separately. However, HMRC may challenge the separation where the businesses are artificially divided.
Source: HMRC guidance on VAT registration thresholds.
Two Companies, One Threshold?
Two genuinely independent companies can usually have separate £90,000 VAT registration thresholds.
Each company normally considers its own taxable turnover when determining whether VAT registration is required. The fact that both companies have common ownership does not, by itself, mean their turnover must be combined.
The position can change where HMRC considers the companies to be artificially separated. In that situation, HMRC may issue a Notice of Direction and treat the activities as one taxable person for VAT purposes.
Source: HMRC guidance on possible business separation conclusions.
HMRC’s Three Main Tests
HMRC does not rely on one factor when assessing separate companies. It looks at the overall commercial relationship between them.
Financial Links
Financial links concern how each company receives, controls, and uses money.
Warning signs may include:
• One company regularly funding the other.
• Shared bank accounts or payment facilities.
• One company paying the other’s suppliers.
• Costs divided without formal agreements.
• Profits moving between companies without commercial reasons.
• Assets used without rent or documented charges.
Commercial loans or shared costs do not automatically prove artificial separation. However, agreements should reflect normal market arrangements.
Economic Links
Economic links concern whether both companies pursue the same commercial objective.
HMRC may examine whether the companies:
- Supply the same products or services.
- Serve the same customer base.
- Share branding, websites, or advertising.
- Depend on each other’s activities.
- Divide one customer journey between two entities.
- Offer complementary services as one package.
A restaurant and connected takeaway business may create concern. The risk increases when customers see one operation rather than two.
Organisational Links
Organisational links concern how both companies operate and make decisions.
Relevant factors may include:
• The same directors managing daily operations.
• Employees working for both companies.
• Shared premises, equipment, vehicles, or telephone numbers.
• One accounting system covering both entities.
• Shared administration and supplier accounts.
• Staff being unable to identify their legal employer.
Common directors alone do not prove VAT disaggregation. The wider operational relationship remains important.
Common Warning Signs
HMRC may investigate arrangements involving functional, geographical, or time-based separation.
• Functional separation divides different parts of one operation. A pub might place drink sales and food sales into separate companies.
• Geographical separation places similar operations at different locations into separate entities. This could include connected shops or launderettes.
• Time-based separation assigns different trading periods to different people or companies. Successive companies might trade until each approaches the VAT threshold.
Other warning signs include:
• Customers paying both companies through the same card terminal.
• One company holding key assets used by both businesses.
• Invoices being issued using the wrong company’s details.
• Businesses changing their structure when turnover approaches £90,000.
These features do not confirm artificial separation. They increase the need for clear commercial evidence.
What Can HMRC Do?
HMRC can take action when separate entities appear to be artificially dividing one business to avoid VAT registration.
Issue a Notice of Direction
HMRC may issue a Notice of Direction where separate entities have financial, economic, and organisational links. The direction can require their activities to be treated as one taxable person from a specified date.
For this to apply, HMRC must establish the relevant links between the entities. The combined activities must also create a liability to register for VAT.
Change Existing VAT Registrations
Once HMRC issues a direction, the affected entities may need to amend or cancel their existing VAT registrations. The VAT position will then be considered based on the combined business activities.
Assess Earlier VAT Liabilities
A different situation arises where HMRC concludes that one legal entity was actually responsible for all the activities. HMRC may then assess VAT that should have been declared from an earlier registration date.
Charge Interest and Penalties
Late VAT registration can result in additional interest and penalties. The potential liability depends on the correct registration date, the amount of VAT involved, and the taxpayer’s behaviour.
The consequences can therefore extend beyond registration, particularly where HMRC identifies an earlier VAT liability.
Reducing Disaggregation Risk
A second company should have a genuine commercial purpose beyond remaining outside VAT. Directors should document why each entity exists. They should also ensure that daily operations support the written position.
Consider the following checklist:
- Keep separate bank accounts and payment facilities.
- Maintain separate accounting and VAT records.
- Use written agreements for shared services and assets.
- Charge commercial rates for shared resources.
- Keep payroll records under the correct employer.
- Clearly identify ownership of stock, equipment and intellectual property.
- Monitor each company’s rolling taxable turnover.
Reliable bookkeeping services can help maintain clear records between connected companies. Specialist VAT registration and return support can also review the structure before HMRC raises questions.
Common Mistakes
Creating separate companies is not enough if the businesses operate as one in practice.
Assuming Separate Companies Are Enough
Companies House registration creates separate legal persons. It does not automatically prove separate businesses for VAT purposes.
Sharing Everything Informally
Shared staff, assets, and premises require proper agreements. Informal arrangements can make commercial independence difficult to demonstrate.
Splitting Sales by Customer Type
Sending business customers through one company and consumers through another can attract HMRC scrutiny.
HMRC may consider this arrangement when assessing whether the companies operate as genuinely independent businesses.
Ignoring the Rolling Threshold
The £90,000 threshold applies across a rolling 12-month period. It does not follow the accounting year.
Waiting for HMRC
Businesses should review the structure before an inspection. Correcting records later cannot always repair weak commercial arrangements.
Conclusion
Having two companies does not automatically mean HMRC will treat them as one business for VAT purposes.
Genuinely independent companies can usually measure their taxable turnover separately. However, the risk increases when they share finances, customers, staff, management, premises, or other resources.
The key is to make sure the commercial reality supports the legal structure. Businesses should review their arrangements regularly, keep proper records, and monitor the rolling VAT registration threshold.
If you are unsure whether your business structure could create a VAT disaggregation issue, professional advice can help you assess the position before HMRC raises concerns.
