14 Jan 2019

VAT & Disaggregation - Plastering over the cracks


HMRC regularly challenge situations where they think a single business has been split to avoid VAT, which they call “disaggregation.”

If there are genuinely two different legal entities carrying on separate activities, but the split is artificial and to avoid VAT, HMRC have the power to issue a Direction that the two businesses should be treated as one, but only from a current or future date.

The situation is more serious where HMRC successfully show that the two trades have been carried on by the same person all along, in which case a VAT registration can be backdated up to 20 years.

This was a challenge faced by a Mr Vaughan recently. A plasterer by trade, he later branched out into Liquid Screed flooring, and that business was split off into a partnership of himself and his wife. Mrs Vaughan did the books and provided some admin services for both trades, but didn’t do any of the contracting work.

Mr Vaughan agreed that the split was made to avoid paying VAT on the plastering work. The partnership was VAT registered, but most of its work was zero-rated. The plastering, however, was not normally on new build properties, and was supplied to private individuals who could not recover VAT. Hence Mr Vaughan did not wish to charge VAT on the plastering.

HMRC argued that both trades were in reality undertaken by Mr Vaughan as a sole trader, in which case a single registration applied to both trades, and compulsorily registered him to the date when the combined turnover exceeded the VAT registration threshold.

The Vaughans could have done much more to demonstrate that there were two businesses, including having separate insurance, credit cards, and ensuring that invoices issued and received were consistently and correctly addressed to or by the partnership/Mr Vaughan personally, as appropriate. While separate bank accounts were set up, at least some floor screed materials were purchased from the plastering account.

Further, the screed pump was purchased by Mr Vaughan personally, and the terms of a grant from the local council forbade him to transfer or sell it to anyone else. Title to the pump was, however, recorded as being transferred to the partnership in the accounts.

Unsurprisingly, given that the partners were husband and wife, the business relationship between them wasn’t formally documented in a written agreement.

However, after a short period, HMRC were notified that the partnership existed and had begun trading, and income tax and CIS returns were filed reflecting that there were two businesses, one a partnership, the other Mr Vaughan as a sole trader.

The Tribunal decided that it was clear that Mr & Mrs Vaughan’s intention was for two separately owned businesses. These businesses had different client bases (plastering for local individuals; whereas the floor screeding was performed for developers, with clients across Wales and into the Midlands.)

The Tribunal decided, on balance, that there was a single business up, until the point the partnership registered for self-assessment as a partnership with the business activity of flooring. After that, there were two businesses, and the Appeal was allowed in part.

The Tribunal expressed no view as to whether the split was artificial, nor whether HMRC can now issue a Direction that the two businesses should be treated as one. As noted above, HMRC can’t issue such a Direction retrospectively, so for the Vaughans, that will be an issue for another day…


This kind of “planning” has been around for years, and Mr Vaughan’s circumstances are far from the most extreme example.

But if you are taking a position HMRC might not agree with, recognise the consequences should HMRC successfully challenge you. Do take great care to ensure there is sufficient documented evidence to support that position.

I think Mr Vaughan could easily have lost this case, and of course, HMRC may yet Appeal.

To discuss this or anything else, please contact Steve Chamberlain on 01225 472800 or send him an email