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How VAT Groups Work and Proposed Changes from the EU Commission

How VAT Groups Work and Proposed Changes from the EU Commission
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. Andrew Needham reveals how companies form part of a VAT group, and when it is not necessarily beneficial for a company to be a group member.


Who Gets Control?


‘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 HMRC send them the VAT return and correspond 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. 

 

Intercompany 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 HMRC gleefully issue assessments to correct the position – with a VAT group this problem disappears.


Input tax recovery is determined in accordance with the use by the group, as a whole, of the goods and services received by each individual member.


Input tax incurred by all the group members can be deducted to the extent that it is attributable to supplies made to persons outside the group which carry the right to deduct input tax.


To be registered for VAT, the holding company must make or intend to 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 can, however, join a VAT group registration comprising some or all of its subsidiary companies provided those companies make taxable supplies outside the group. By including a holding company within a VAT group you can increase the amount of input tax that can be recovered.


Practical Tip

A company claiming regular repayments is best not grouped with one making payments.  This is because a company in a repayment position can reclaim its VAT on a monthly return.  If grouped with a payment business they could have to wait an additional two months before being able to offset it against the payment due on the quarterly return.

 

Andrew Needham