Changes to VAT Group rules – an increased opportunity

From 1 November 2019 the rules for VAT grouping have changed.

What is a VAT group?

A VAT group allows two or more entities to account for VAT under a single registration number with one of the corporate bodies in the group acting as the representative member.

The group is registered in the name of that representative member, who is responsible, on behalf of all of the other members of the group, for completing VAT returns and paying and reclaiming VAT.

All supplies of goods and services made by any member of the group to a third party outside the group are treated as having been made by the representative member. Similarly, any supply of goods or services made by a third party outside the group to any member of the group is treated as having been made to the representative member.

Supplies of goods or services between group members are not subject to VAT and a single VAT return will be completed each period for the entire group, as opposed to separate businesses submitting individual returns.

The changes

Prior to 1 November, only bodies corporate were able to form a VAT group (mainly companies and LLPs). From the beginning of this month, VAT grouping is additionally available for all entities, including; partnerships, sole traders and trusts in certain cases.

Eligibility

Via existing legislation, grouping is permitted if the control tests are passed. Bodies corporate can form a VAT group if:

• each is established or has a fixed establishment in the UK
• they are under common control

(There are additional tests for certain ‘specified bodies’ set out in Notice 700/2 para 3.2)

‘Control’ has a specific meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006.

New changes to eligibility

Non-corporate entities such as individuals and partnerships can now join a VAT group if they meet all of the following conditions:

• they are established, or have a fixed establishment in the UK
• they can demonstrate that they control all of its body corporate subsidiaries in the group. The test will apply assuming the non-corporate entity would pass the test if it was a corporate body, eg; usually meaning 51% or more of share capital in the relevant company/companies
• they can demonstrate that they are entitled to VAT register independently of any other business (the distinction here is that a body corporate may be included in a VAT group if it is not trading, nor intends to trade)

The current eligibility to group is set out at VAT Act 1994, Section 43A and has been updated with a new section 43AZA which includes the new changes.

VAT Group pros and cons

So, would it be beneficial to VAT group entities? I set out here the pros and cons for businesses.

  Pros

• only one VAT return per quarter – less administration
• no VAT on supplies between VAT group members.
• no need to invoice etc or recognise supplies on VAT returns
• likely to improve partial exemption position if exempt supplies are made between group companies.
• likely to improve input tax recovery if taxable supplies are made to partly exempt group companies
• may provide useful planning opportunities/convenience at a later date.

Cons

• all members of the group are jointly and severally liable for any VAT due
• only one partial exemption de-minimis limit for group
• obtaining all relevant data to complete one return may take time thus increasing the potential for missing filing deadlines
• a new VAT number is issued
• assessments can be issued to the representative member relating to earlier periods when it was not the representative member and even when it was not a member of the group at that time
• the limit for voluntary disclosures of errors on past returns applies to the group as a whole (rather than each company having its own limit)
• payments on account limits apply to the group as a whole.  This applies to a business whose VAT liability is more than £2million pa.  Please see HMRC Reference: Notice 700/60 details here
• may detrimentally affect partial exemption position if a partly exempt company makes taxable supplies to a fully taxable group company

Planning

If you think that there is a potential advantage for you, or your clients’ business, in VAT grouping, please contact us to discuss the VAT position.