HMRC has published a summary of responses to its long running consultation on the future of VAT grouping. The consultation, which was launched before the Brexit referendum took place, looked at options for reforming VAT grouping in the light of two relatively recent European Court decisions, and also asked for views on the interaction of VAT grouping and the cost sharing exemption.
Who can join a VAT group?
In common with several other EU member states, HMRC restricts membership of a VAT group registration to corporate entities only. However, the 2015 judgment in Larentia + Minerva appeared to open the door to allow the inclusion of other legal entities in VAT groups as long as they fall within other eligibility requirements, eg they are under common control with the other group members and HMRC has no grounds to exclude them to prevent tax avoidance or evasion.
While most respondents were broadly happy with the UK’s other eligibility tests, HMRC reports that all respondents to the consultation agreed that VAT grouping should not be restricted on the basis of legal entity alone. Some suggested new targeted anti-avoidance rules as an alternative to a blanket exclusion on non-corporate entities, but there was no clear consensus on how this should be done, so HMRC says it will explore this further. Other respondents noted that certain entities, such as charities and trustees, found the joint and several liability requirement a barrier to joining a VAT group, but the response document notes that the Government has no current plans to change the joint and several liability rules.
Cross border VAT grouping
The CJEU’s judgment in Skandia affects VAT grouping of entities with establishments in more than one country. Some EU member states restrict VAT grouping to the establishment located in their member state only. This has the effect of creating separate entities for VAT purposes, so an intra-company supply from one establishment to another can be a supply for VAT purposes. Other member states, including the UK, allow the whole company to join the group.
HMRC introduced a new policy in 2015 under which a UK-established entity and its overseas establishment are to be treated as separate entities if the overseas establishment is VAT-grouped in a member state that operates ‘establishment only’ grouping provisions. Therefore, businesses must treat intra-entity services provided between those establishments as supplies made to a separate taxable person and account for VAT accordingly.
Respondents felt that HMRC’s new policy had created additional cost and complexity for businesses – including difficulty in establishing whether or not a member state operated ‘establishment only’ grouping conditions - and some double taxation issues with member states which had interpreted Skandia differently. Most wanted an update from HMRC on its Skandia policy and clearer guidance on the position in other EU member states. However, while it acknowledged these points, HMRC said it was the responsibility of individual businesses operating cross border to comply with local VAT grouping rules and makes no comments on whether the Skandia issue will be given further consideration. That said, the impact of Skandia has been flagged at EU level as an area requiring clarification so HMRC may be waiting for the EU’s next move, or to make its own changes after Brexit.
Cost sharing groups
Most respondents thought there was limited interaction between VAT grouping and the cost sharing exemption and thought the two topics should be considered separately. HMRC therefore confirmed that it has no further plans to continue this aspect of the consultation.
HMRC’s report is surprisingly brief and does not yet commit to any changes to VAT grouping in the UK. HMRC says it will continue to discuss the outcome with stakeholder groups and there may be further consultation, for example on eligibility tests for non-corporate entities. HMRC’s comments also suggest that no firm decisions will be made on VAT grouping reforms until more is known about the effect of the UK’s forthcoming departure from the European Union. It will therefore be some time before we know if partnerships, unincorporated associations or sole traders will be allowed to join a VAT group in the UK.
For help and advice on group registration or any other VAT issue please get in touch with your usual BDO VAT contact or Michael Ashdown.