VAT Grouping – The acceptable face of VAT planning

A question that we are frequently asked by our clients is “Should I create a VAT group?”

With changes in the eligibility rules extending membership of a VAT group to individuals and partnerships, this is a question that is likely to crop up even more frequently.

Historically, the UK VAT group rules were restricted to ‘bodies corporate’.  As a result, membership was limited to Limited Companies, Limited Liability Partnerships, etc. when the following criteria were met:

• They were each established in the UK; and
• They were held under common control. Common control is defined as either all members of the group are controlled by one member, or they are all controlled by a single ‘person’ (e.g. a company, an individual, or a partnership) outside the group.

However, following a decision in the Court of Justice of the European Union, the restriction to bodies corporate was challenged and changes to the eligibility criteria were included in the 2019 Finance Act.  With effect from 1 November 2019, VAT groups can now include an individual or a partnership provided that they have a business establishment in the UK and they control the other members of the VAT group.

When asked, we advise our clients that, in the right circumstances, being a member of a VAT group can bring some advantages.

Previously, key amongst these advantages, was the simplification of the VAT accounts.  With only one VAT return needed for the group, the scope to incur a surcharge for late submission is reduced.  However, following the introduction of Making Tax Digital for VAT, the need for digital links between the records of each of the VAT group members may create new issues.  In addition, collating information from a variety of sources can be more difficult and may lead to delays.

Another advantage of VAT grouping is that supplies between group members are disregarded.  This is particularly important where members of the VAT group are VAT exempt.  When businesses are separately registered, irrecoverable VAT may be generated on inter-company charges.  VAT grouping treats these supplies as outside the scope of VAT, avoiding the VAT charge.

Whilst VAT grouping an exempt business with a taxable business may help improve VAT recovery, care should be taken as the generation of exempt supplies by the VAT group could taint the VAT recovery as a whole.

Creation of a VAT group can also impact on the group’s cash flow.  Combining VAT returns can bring the group into the Payment-on-Account regime, requiring monthly VAT payments.  In addition, stand-alone ‘repayment’ businesses can elect to submit monthly returns, a cash flow benefit that could be lost if it joins a ‘payment’ VAT group.

VAT group members share a joint and several liability for the VAT payable.  This means that if one VAT group member becomes insolvent the rest of the group will be liable for its VAT debt.

In addition to the above, consideration has to be given to the initial administration required when first becoming part of a VAT group.  Any previous VAT registrations are cancelled and replaced with one single group VAT registration number.  The new VAT group would need to ensure that customers and suppliers are notified of the changes from the effective date.  In addition, the new VAT group details will need to be reflected on invoices, letterheads and accounting systems.

Consequently, whilst not the best answer for every client, in many cases, VAT group registrations are a very efficient way of managing VAT affairs for corporate groups and, from 1 November 2019, that can also be extended to some individuals and partnerships.

If you have any queries please do not hesitate to contact Alistair Duncan, Director  and Head of Indirect Tax or your usual AAB contact.