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Introduction

The Advocate General delivered his opinion yesterday (27 November) on whether or not non-taxable persons could validly be included in a VAT group. The Irish case has strong parallels with the domestic treatment here in the UK and will be encouraging for the many UK businesses with VAT groups containing passive holding companies, and/or dormant companies, pending formal judgment expected early 2013.

Background

Several countries, including the UK and Ireland, allow non-taxable persons to be included in VAT groups for ease of administration. From a UK perspective, a typical example would be a holding company that does little more than passively hold shares in the group's 'active' companies. Or, a dormant subsidiary that is maintained within an overarching group registration for convenience.

From a UK perspective, membership of a VAT group may potentially also allow a non-taxable but active company (e.g., a charity) to reclaim Input VAT under the Partial Exemption rules, thereby granting an opportunity to reclaim VAT that it might not enjoy as a standalone company.

Other member states have objected to this facility and almost exactly three years ago, the European Commission instigated infringement proceedings which required the 'offending' countries to change their domestic rules in line with other member states. If the UK had simply complied, it might have meant that large numbers of UK VAT groups would have had to eject their holding companies, and/or dormant members. However, HMRC has consistently disagreed with the European Commission on this point, and has since robustly defended the UK position alongside its fellow recalcitrants.

Opinion

The Advocate General has published his opinion on the Irish case as being broadly representative of the issues at stake for the other countries and his opinion resoundingly favours the argument that non-taxable persons may be included, for instance at paragraph 52:

"However, in my opinion it is not an anomaly that non‑taxable persons can belong to a VAT group."

Of course it is the judgment in the UK Case C86-11 which is most important but the judgment is rarely at odds with the Advocate General's opinion, which bodes well for the final decision next year.