Basically an anti-avoidance provision, this rule is aimed at preventing avoidance of VAT by the maintenance or creation of any ‘artificial’ separation of business activities carried on by two or more persons. Schedule 1 to Value Added Tax Act 1994 (VATA 1994) deals with disaggregation of businesses as follows:<\/p>\n
Para 1A(1): Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.<\/p>\n
Para 1A(2):\u00a0In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.<\/p>\n
Para 2 specifies the impact upon the constituent members of the businesses caught by these rules as follows:<\/p>\n
a) The taxable person carrying on the specified business is registrable in such name as the persons named in the direction jointly nominate in writing within 14 days of the direction. Otherwise the taxable person is registrable in such name as may be specified in the direction.<\/p>\n
(b)\u00a0Any supply of goods or services by or to one of the constituent members in the course of the specified business is treated as a supply by or to the taxable person.<\/p>\n
(c)\u00a0Any acquisition of goods from another EU country by one of the constituent members in the course of the specified business is treated as an acquisition by the taxable person.<\/p>\n
(d) Each of the constituent members is jointly and severally liable for any VAT due from the taxable person.<\/p>\n
(e)\u00a0Without prejudice to (d<\/em>) above, any failure by a taxable person to comply with any VAT requirement is treated as a failure by each of the constituent members severally.<\/p>\n (f) Subject to (a<\/em>)\u2013(e<\/em>) above, the constituent members are treated as a partnership carrying on the specified business and any question as to the scope of that business at any time is determined accordingly.<\/p>\n That brings us to the question as to what exactly is \u2018artificial separation of business\u2019? Well, artificial separation arises where the entities, closely bound to one another by financial, economic and organisational links, disaggregate businesses with a view to avoiding VAT. In order to prove artificial separation generally at least one link needs to be established under each head:<\/p>\n HMRC\u2019s view on what constitutes disaggregation of businesses to avoid VAT is contained in VAT notice 700\/1. Generally, HMRC would look at striking at least one link each under financial, organizational and economic heads before proceeding to issue a direction. That said HMRC, as a general rule, would view the following to be a single taxable entity:<\/p>\n Here are some examples, where the businesses were held to be artificially separated with a view to avoiding VAT:<\/p>\n\n
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