Enter Your E-mail

Andrew Needham of VAT Specialists Ltd comments on the VAT grouping rules and some proposed changes.

VAT Groups - Current Rules

The Basics

EU legislation allows two or more corporate bodies under common control to form a VAT group, which has a single VAT return covering all the companies in the group. 

Not all the companies under common control have to be included in the VAT group, it is at the discretion of the businesses.

‘Control’ usually means over 50% of the votes of the share capital. Normally, that means a majority of the shares, but control can be held by another limited company, not necessarily a member of the VAT group, or by an individual or two or more individuals carrying on a business in partnership. The controlling person can be anywhere in the world - not necessarily in the UK.

Only ‘bodies corporate’ can be grouped for VAT purposes. This normally means limited companies although limited liability partnerships also qualify.

One company acts as the ‘representative member’ of the group and the VATman sends them the VAT return and corresponds with them on all VAT matters. Any member of the group can be the representative member, it does not have to be the holding company or the ‘parent’. All inputs and outputs are treated as being those of the representative member. 

A business can apply to group, de-group, or to alter the membership of the group at any time. HMRC can refuse or can remove a company from a group, but these powers are normally only used if they think the business is trying to save VAT with an artificial avoidance scheme. 

Group VAT Registration and Intra-Group Transactions

Transactions between group members are ignored for VAT purposes – this is useful when there are intercompany management charges because businesses often forget to charge VAT and the VATman gleefully issue assessments to correct the position – with a VAT group this problem disappears.

Input tax recovery is determined in accordance with the use of the goods or services by the group, as a whole. This means that the partial exemption de-minimis limits apply to the group as a whole rather to each individual company.

Group VAT Registration and Holding Companies

Including a holding company can increase VAT recovery on the holding company's overheads. To be registered for VAT, the holding company must normally make taxable supplies. These may consist, wholly or partly, of supplies of management services to one or more of the holding company's subsidiaries.

A holding company that makes no taxable supplies, and therefore cannot register for VAT on its own can, however, join a VAT group registration comprising some or all of its subsidiary companies provided those companies make taxable supplies outside the group.

Impending Changes to Group VAT Registration

The European Commission has announced a review into VAT grouping with a view to standardising the rules across the EU. The full details can be found at:
VAT: The European Commission Calls for a  Harmonised Application of the VAT Grouping Rules

The main element that will affect the UK relates to the treatment of holding companies.

The proposal, which has now been backed up by the EU Commission issuing infringement proceedings against the UK as well as a reasoned opinion, relates to the exclusion of holding companies from VAT groups. The VATman has confirmed that he will challenge this proposal so any changes will not happen for some time. If the changes go through, it will result in pure holding companies being removed from VAT groups and a consequent restriction in the amount of input tax that can be recovered by holding companies. 

Planning for Possible Group VAT Registration Changes

In the meantime, businesses that could be affected by these changes should try and ensure that the holding companies do make some sort of taxable supplies, for example genuine management charges being made to the group companies.

This is still at a very early stage and any possible changes resulting from these proposals will be at least a couple of years away from past experience, so businesses should be able to plan around them.