Pyrrhic victory for HMRC in artificial business separation case

January 2019

Darren Vaughan vs HM Revenue and Customs

Issue - Whether two family businesses should be treated as a single entity for VAT purposes

The judgment in Darren Vaughan vs HMRC [TC06910] provides a timely reminder of some of the golden rules which must be considered when the issue of business separation rears its head.

The case involved two businesses - one a plastering business run by Mr Vaughan as sole trader, the second a liquid floor-screeding business operated by Mr Vaughan & Mrs Vaughan in partnership.  

Mr Vaughan explained to the Tribunal that the floor screeding business typically involved works as subcontractor for new build housing developers.  The works could therefore be zero-rated and VAT could be reclaimed on 'building materials'.  The SP plastering business generally involved supplies to private customers and there was an obvious benefit in remaining unregistered - i.e... competitive pricing.

During the hearing,it became apparent that the partnership had only existed for part of the period at issue.  Self-assessment submissions,  website information, invoices etc. all provided a body of evidence which demonstrated that the plastering and floor screeding businesses did, for a time, operate as one.

HMRC cited the lack of a partnership agreement, inconsistency of invoicing and the minimal input of Mrs Vaughan as evidence that the businesses had operated as a single business throughout the period.

The Tribunal, citing Belcher, concluded that sufficient efforts had been made to separate the businesses.  It noted each business's different customer base and said that neither the absence of a partnership agreement nor the minimal role of Mrs Vaughan prevented her from being a partner in the flooring business.

Of course HMRC can claim a partial victory for the years before the partnership began operating.  Of concern to HMRC, however, will be the fact that their victory has really only served to demonstrate the simple steps are required to separate what would otherwise be a single business!






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