VAT disaggregation
Artificially splitting a business that makes taxable supplies to avoid crossing the VAT threshold (£90,000) is called disaggregation. HMRC would likely deem such a move tax avoidance. Where there were always initially two separate businesses, which have independently grown so that the combined turnover is over £90k, VAT registration may not be required. Still, steps should be taken to maintain a separate identity and prevent the two businesses from becoming blurred. Splitting a business is more likely to be accepted by HMRC if there is some commercial justification.

Linked businesses
HMRC will likely link two businesses together unless there is clear evidence that the businesses were historically unconnected. To maintain a distinction, there should be minimal economic, organisation or economic links. If the only apparent reason to split a business would appear to be to avoid VAT registration HMRC would likely treat it as one.

Examples of economic links
1.    Common customer base
2.    Trades are connected
3.    The objectives of the business are the same

Examples of financial links
1.    Financed by the other
2.    Shared bank accounts

Examples of organisation links
1.    The director, employees and subcontractors are the same
2.    The assets are used by both (vans, tools, computers)
3.    The base that the trade is from is the same

One of most important of these to satisfy is the identity of the customer base and the nature of the work done. If the work is similar and the customers are similar, almost no amount of separation and careful segregation on the other points would suffice for HMRC.

Some examples
Bob is a builder who recently qualified as an electrician. He works part-time for a friend's building company and has been running his own company for a few years at the weekends, remaining below the VAT threshold. He has decided to go full-time doing both building and electrician works, but after six months, he hits the VAT threshold. Bob's customers are not VAT registered and say they won't offer him further work if he charges VAT on top of his quotes. Bob is worried he will be uncompetitive and decides to split his business into two companies, one doing building work and another doing electrician work. He uses the same van and tools for both companies, the same subcontractor for both works, and bills the same customers from each company and receives money into separate bank accounts. He now has a turnover of £75k in each company (£150k in total).

In this example, Bob has artificially split his company. HMRC could charge him with tax avoidance and he could be liable to an assessment of his turnover to VAT with interest and penalties for non-compliance. However, if Bob ran a company in Surrey doing the electric work and used his building company for customers only based in Yorkshire he would have grounds for defending the split. It would be essential that he keeps the businesses separate, since HMRC will always look at any other available evidence of common links.

Jane is a trained therapist providing private service, renting a room in the local community centre and is careful to stay below the £90k turnover threshold. Her partner runs a business from home selling hand-made crafts on Amazon. Her partner has no input in the therapy business, but Jane does sometimes help in the crafts business and was recently appointed a director and is concerned that her involvement could be a VAT issue under the disaggregation rules.

In this example, Jane will unlikely have an issue with VAT as there is a clear distinction between these trades which have never historically been connected. The customer base is unique, and even though there are some organisational links between them, there remains a clear distinction between the businesses. They should be careful to maintain this.

John Caton v HMRC (2019)
This real life case was a taxpayer who ran a cafe for several years. His wife then opened a restaurant next door. They shared a few communal areas, but largely ran their businesses independent of each other. The customer base was different and the staff were employed separately and were unknown to the other. HMRC issued a VAT assessment and penalties on the basis the split was artificial. Mr Caton appealed and won. The judge ruled that the businesses were always independent and run by different people, who happened to be connected as husband and wife. The HMRC case focused on the smallest details of how each business was run and whether they interacted, including how they ordered and received supplies from the same wholesalers. It emphasises the importance of maintaining an arms length separation and a normal commercial relationship, where there is potential for HMRC to suggest the business split is artificial.

Things to consider
Assuming that your customer base in both businesses is unique, how similar are your services? Do you have a separate bank account and accounting records? Is your website and advertising separate? If you have a single website HMRC would use this as evidence that the business is one. Do you have a single insurance policy for the business? If you actually have two businesses, you would need separate public liability insurance for each. The absence of this would indicate to HMRC that you are either breaking the law or are operating a single business. Finally, what would other people think - friends, family, potential customers? If they wouldn't realise you were running two business then it is a good chance HMRC will also think the same.

Legitimately splitting a business
In some cases where there is a mixed supply of income and where some aspects are not subject to vat (such as rental income), it may be beneficial to split a business. For example, splitting a property repairs business which also rents residential property would avoid the company having to deal with complex partial exemption rules. There would be no tax avoidance by splitting the business into exempt and vatable income.