VAT Groups Explained

The general principle of a VAT group is that two or more eligible persons may account for VAT under a single registration number. One person within the group must function as the representative member and is responsible for completing VAT returns and paying and reclaiming VAT on behalf of other members of the group. However, all the eligible persons are jointly and severally liable for any VAT debts.

Eligibility for VAT group treatment is permitted only where all conditions set out by HMRC are met.

In a previous article entitled ‘HMRC Targeting VAT Grouping in the Care Industry | Crackdown on Tax Avoidance,’ we explained how HMRC focuses its attention on specific service and industry sectors when conducting VAT investigations.

We are regularly consulted by clients regarding issues arising from misunderstanding the implications of VAT Grouping, which suggests that a more detailed explanation of such arrangements may prove helpful.

Managing VAT liability separately for corporate groups or companies with a number of subsidiaries can be cumbersome, inefficient and costly. Accordingly, many companies subject to common economic ownership operate ‘in groups,’ which are recognised in different areas of tax legislation and which, while providing a variety of advantages, may give rise to areas of concern.

Tim Thompson, Partner and Head of Tax Litigation at KANGS outlines some of the implications of obtaining a VAT group registration.

Eligibility for VAT Group Registration

In order to qualify for VAT group registration, several criteria must be met:

• ownership and control; all members must be closely bound by economic, financial and organisational ties,

• each company must be established in the UK, or at least, have a fixed UK establishment,

• at least one company must already be registered for VAT or required to register.

When seeking a group registration, an application must be made to HMRC for approval where it will consider the:

• nature of control within the proposed members,

• financial standing of each company,

• compliance history of each company.

Group registration is not available to:

• overseas companies with no UK establishment,

• partnerships, unless corporate members are included,

• charities and not for profit organisations,

• individuals.

Joint and Several liability.

This potential liability lies at the heart of group registration and signifies the extent of the trust and reliability which must exist within the group.

If one or more of the companies within the group fails to meet its obligations to HMRC, the remaining company or companies are each liable for the whole of the outstanding debt. HMRC is only interested in recovering the whole debt from such company or companies having assets to cover the same and will not become involved in considering any degree of proportionality.

The Relevant Law

The Value Added Tax 1994

S.43 Groups of companies

Where, by virtue of the provisions set out, any persons are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and:

• any supply of goods or services by a member of the group to another member of the group shall be disregarded; and

• any supply which is a supply to which the above paragraph does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member; and

• any VAT paid or payable by a member of the group on the importation of goods shall be treated as paid or payable by the representative member and the goods shall be treated, as imported by the representative member.

All members of the group shall be liable jointly and severally for any VAT due from the representative member.

VAT Groups | Benefits and Disadvantages of Registration

Benefits of VAT Groups

Registration as a VAT group offers several practical advantages such as:

• it enables accounting to be consolidated thereby reducing the administrative burden, as VAT groups members are treated as a single taxable entity. The representative member submits a consolidated claim, thereby reducing the workload and cost of producing multiple returns,

• supplies made by or to any member of the same VAT group are, for VAT purposes, treated as made by or to the member of that group nominated as the ‘representative member,’

• trading between members of the same VAT group is normally ignored for VAT purposes, subject to specific exceptions. This releases cash which may otherwise be caught in unnecessary VAT payments and reclaims.

Disadvantages of VAT Groups

These include:

• the attendant risk of joint and several liability, explained above,

• with individual VAT registrations being lost, businesses lose the ability to control their own recoveries or specific VAT schemes,

• recovery of input VAT may become more difficult when HMRC challenge the supply link,

• shared costs may pose partial exemption complications,

• as overseas subsidiaries or branches cannot be included, multinational organisations will face organisational challenges.

• certain accounting schemes are not available to VAT groups.

HMRC and Tax Avoidance

HMRC is cracking down on underpaid VAT from both companies and VAT groups and may apply additional scrutiny on businesses attempting to join VAT groups, as well as to VAT group returns, especially if they involve high-value transactions or cross-border activities.
HMRC may refuse group registration if it suspects VAT avoidance or a risk of revenue loss, which could result in:

• more frequent VAT audits,

• increased queries about intra-group and external transactions.

HMRC is entitled to remove any member from a VAT group where it believes it is necessary to protect the Revenue.

Amongst other activity HMRC will:

• refuse new VAT group registration applications seen to be created solely for the purpose of obtaining a tax advantage,

• request detailed information on how VAT is accounted for within a group,

• investigate the flow of supplies and costs within the group between regulated and unregulated companies.

How Can We Help?

If your company operates as part of a VAT group and is subject to an HMRC enquiry or investigation, it is advisable to seek expert advice without delay. Our team possesses extensive experience in managing a wide range of tax disputes involving HMRC.

The team at KANGS has a long history of successfully representing clients in complex tax and VAT investigations. We act for taxpayers in the full array of HMRC investigations including:

• Kittel VAT Assessments
• COP8 Investigations
• COP9 Investigations
• Discovery Assessments
• Personal Liability Notices for company directors, officers and managers
• HMRC Criminal Investigations

With over twenty-five years of experience in both strategic negotiations and litigation with HMRC, we have the knowledge and experience to protect our client’s interests. Please feel free to contact us using the details below:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.

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