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Steven Allen of VAT Advisers Ltd provides an update on VAT grouping issues.

Background

Back in November 2009, the European Commission announced that it was taking infringement proceedings against the UK and seven other Member States for breaches of the EU VAT grouping rules. Under this procedure, the offending states have two months to change their legislation, after which, the Commission can refer the matter to the ECJ.

To date, only Spain has complied, so the remaining seven States, including the UK, have now been referred to the ECJ per a Commission press release dated 24 June 2010.

VAT Grouping Rules

By way of a quick recap, the VAT grouping rules derive from an administrative simplification in EU VAT law which gives Member States the option “to regard as one single taxable person those who, while legally independent, are closely bound to one another by financial, economic and organizational links”. EU regulations on grouping have long been in place for Member States to follow. 

Countries Perceived to be In Breach of VAT Grouping Rules

The UK, Ireland, the Netherlands, Finland, Czech Republic, and Denmark are in breach of the regulations for allowing ‘non-taxable persons’ to be in a VAT group. Sweden and Finland (again) are in breach for restricting grouping to financial and insurance services.

In European law, the term ‘non-taxable person’ refers to entities that are not considered to be engaged in ‘economic activities’, so dormant companies and ‘passive’ holding companies (i.e., ones that merely hold shares) would be excluded from grouping. This would likely impact the corporate finance world, where acquisition vehicles are commonly grouped with the target company for VAT recovery. It might also impact charities where the parent entity only has non-business income and is grouped with a trading subsidiary for VAT recovery purposes. However, there is concern that the term could be extended to include corporate bodies making infrequent supplies, or start-up businesses where supplies are made some time after registration.

What Will Happen?

HMRC informed the Commission in January that it will defend its position, so the matter will now be resolved by an ECJ decision (which might take a year or more to happen). The smart money is on the ECJ siding with the Commission, so we can only imagine the amount of degrouping that will have to be done as a result. Moreover, this en masse degrouping would be an unforeseen compliance cost to businesses, as well as being a further strain on HMRC’s already overstretched resources. 

[ For further information on VAT Groups, see How VAT Groups Work and Proposed Changes from the EU Commission - Ed. ]