If you’re a partnership or an individual, you can now join a VAT group. Doing so can certainly make life easier but there are some things you should consider before doing so. First, let’s look at what a VAT group is and how and why the legislation has changed.
A VAT group enables two or more companies to be treated as a single taxable entity for VAT purposes and submit just one VAT return for each obligation period, helping to simplify the process. Until recently only a bodies corporate (i.e. companies of all types VAT notice 700/2 section 10) established in the UK could be a member of a VAT group.
The Finance Act 2019, Schedule 18 extended the rules so that specific non-corporate entities – partnerships, individuals and Scottish partnerships – may now join a VAT group if they meet the conditions. These provisions came into force on 1 November 2019, with the extension a result of several influential ECJ judgements.
The conditions are that the partnership or individual must:
- control a body corporate (or all the bodies corporate) in order that they can form a VAT group. (Control exists where the parent company owns 51% or more shares in all other members or where you would be a parent company if you were a company or where you are empowered by statute to control the company VAT notice 700/2 section 2.9).
- Have a fixed establishment in the UK.
So, if you fulfil these criteria, should you go ahead and join a VAT group? Well, it’s not quite as clear-cut as that. There are arguments for and against both pluses and minuses to becoming part of a VAT group.
There are a number of advantages to group registration:
- It potentially reduces the compliance burden in that just one VAT return needs to be submitted for the whole group.
- Intra- group charges are not subject to VAT and this can lead to cost savings on supplies between related businesses where input tax would not ordinarily be recoverable because of the business making exempt supplies.
- Exempt supplies from one company to another can be disregarded, meaning that the exposure to input VAT recovery restriction is removed.
- The VAT consequences of transferring assets within the VAT group, say restructuring in advance of a sale of a company, can be ignored.
- There can be cash flow benefits where VAT staggers are not aligned and the output VAT would have otherwise been paid over to HMRC by the company e.g. providing management services, before the input VAT recovery.
Yet there are also significant disadvantages.
- All VAT group members are jointly and severally liable for VAT debts of the group. Therefore, if one company defaults and cannot pay, the profitable members must jointly pick-up the debt.
- Under anti-avoidance provisions, any member of the VAT group can be held liable for assessments for periods in relation to the VAT group, irrespective of whether or not they were a member during that period.
- If you make exempt supplies, the partial exemption de minimis test applies to the consolidated exempt input tax figure, meaning that you are more likely to be partially exempt and therefore unable to recover all input VAT.
- The limit for error correction applies to the group as a whole, as does the payment on account limit.
- If an option to tax is made in respect to a property held within the VAT group, this is binding on all present and future members of the VAT group.
Whether you decide to become part of a VAT group will require careful consideration of all of these factors.
If you’ve got a question about how AlphaVAT can assist you with your VAT Group compliance then do reach out to us directly via firstname.lastname@example.org or on 01784 777 700.