VAT registration of provider of furnished holiday lets

Q: A client has income from two Furnished Holiday Lets (FHLs) which are situated on the same site in Cornwall; one is owned solely by Mr Smith and one is owned jointly by Mr & Mrs Smith. Each FHL has a taxable turnover of £50k and they are advertised through the same holiday agent. Neither Mr Smith (as sole trader) nor Mr & Mrs Smith (as partnership) are currently UK VAT registered, but they share the same agent & cleaner who are paid by Mr Smith; no cross charge is made to Mr & Mrs Smith for this service. Would this be seen by HMRC as Mr Smith as sole trader making taxable supplies of £100k per 12 months and so a backdated VAT registration applied?

A: Possibly. HMRC will address a case like this by applying their Statement of Practice 4 (1983) with regards to the issue of the artificial separation of business activities to try and determine whether:

There are 2 businesses in separate legal entities (sole trader and partnership) and so they can remain unregistered for VAT as each of their taxable turnovers, at £50k, are below the current VAT registration limit of £85k;
There are 2 legal entities but that split is artificial and so HMRC would then issue a direction that, from a current date, they should be treated as one business and so be immediately VAT registered; or,
There is a failed separation so in HMRC’s eyes there was only ever one entity that has been operating one business and this entity would be VAT registrable from when (in the past) the combined taxable turnover limit for VAT was breached.

See HMRC’s VAT Single Entity and Disaggregation manual online (including VATDSAG02100) for further guidance. This is not an exact science but, on the facts given, there appears to be a strong risk of challenge from HMRC, especially if they can show close financial, economic and organisational links between the two FHL activities, for example the lack of cross-charges, the close proximity of the FHLs, the same agent and cleaner used and, potentially, the extent of Mrs Smith’s involvement in either ‘business’.

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