Readers’ forum: Problem with split of cleaning business?

One of my clients owns a contract cleaning business which trades as a limited company let’s say Company A. The company is VAT registered but I suspect that it has a potential problem with its business model. The cleaners used by my client are self-employed but not registered for VAT because they earn less than £85 000 each year. The usual arrangement is for the cleaner to invoice Company A which then invoices the final customer charging 20% VAT.

However if the final customer is not registered for VAT – or cannot claim input tax – my client gets the cleaners to invoice a separate company he controls with his wife – Company B – the latter is not registered for VAT. Company B then invoices the final customer charging a 10% premium on these fees – effectively sharing the VAT saving with the final...