Guidance

Group and divisional registration (VAT Notice 700/2)

Find out about group and divisional VAT registration and the forms you should use to apply.

• From: HM Revenue & Customs
• Published: 8 August 2014
• Last updated: 25 January 2024 — See all updates

Foreword

This notice cancels and replaces Notice 700/2 (August 2014).

1. Basic information about registering groups and divisions for VAT

1.1 What this notice is about

This notice provides general background information about group and divisional registration and it also explains which forms you need to use to apply for group or divisional registration. All references in this notice to the UK include the Isle of Man.

1.2 What has changed

As announced at Budget 2018, HMRC has revised existing guidance for VAT groups to reflect the legislative changes to the eligibility criteria to include certain non-corporate entities, which are individuals, partnerships and Scottish partnerships. Other unincorporated bodies are not included. These changes are in line with provisions in Finance Act 2019 coming into force and take effect from 1 November 2019.

1.3 VAT group registration

VAT grouping is a facilitation measure by which 2 or more eligible persons can be treated as a single taxable person for VAT purposes. Eligible persons are bodies corporate, individuals, partnerships and Scottish partnerships, provided that certain conditions are satisfied (read section 2.2). Bodies corporate includes companies of all types (read section 10) and limited liability partnerships.

1.4 Divisional registration

This is a facility that allows a corporate body which carries on its business through a number of self-accounting units to register each of those units or divisions separately for VAT. Guidance on divisional registration is in section 9.

1.5 Combining VAT groups and divisional registrations

You cannot combine the two. A corporate body, which is registered for VAT in the names of its divisions, cannot have one of its divisions included in a VAT group. Similarly, a corporate body that is a member of a VAT group will not be allowed to register one of its divisions separately outside the group.

If a company which is a member of a VAT group wishes to register some of its divisions separately, it must first apply to leave the VAT group before it can apply for registration in the names of its divisions.

Conversely, a corporate body, which is registered in the names of its divisions and wishes to form a VAT group with other associated companies or to join an existing VAT group, must first apply to cancel the registration of all of its divisions.

2. Group registration

2.1 How group registration works

A group of eligible persons may apply to be treated as a single taxable person for VAT purposes. The registration is made in the name of the representative member, who is responsible for completing and rendering the single return on behalf of the group. Whilst the representative member is responsible for paying the VAT or receiving any repayment due, all the eligible persons are jointly and severally liable for any VAT debts. Supplies between group members are normally disregarded for VAT (read section 7 for details of when supplies are not disregarded).

2.2 Who can join a VAT group

2.2.1 Bodies Corporate

Under section 43A of the VAT Act 1994, bodies corporate can form a VAT group if:

• each is established or has a fixed establishment in the UK (read section 10.4)
• they are under common control (read paragraph 2.9)
• they satisfy the conditions set out in section 3 (if applicable)

‘Control’ for this purpose has a special meaning based on the definition of holding company and subsidiary in section 1159 of and Schedule 6 to the Companies Act 2006. This definition of VAT group eligibility has been in force since 1999.

2.2.2 Individuals, Partnerships and Scottish partnerships

Under section 43A and 43AZA of the VAT Act 1994, non-corporate entities such as individuals and partnerships can join a VAT group if they:

• control the UK body corporate or all of the UK bodies corporate in the VAT group (read section 2.9)
• are carrying on a business by making supplies
• are established, or have a fixed establishment in the UK in relation to that business (read section 10.4)

An individual or partnership controls a UK body corporate if it would, as a company, be the UK body corporate’s holding company.

A partnership for this purpose means 2 or more individuals, body corporates or Scottish partnerships carrying on a business in partnership.

2.3 The essential features of group registration

These are:

• the representative member accounts for any tax due on supplies made by the group to third parties outside the group — this is particularly helpful if your accounting is centralised
• as the group is treated as a single taxable person, you do not normally account for VAT on goods or services supplied between group members
• you send a single VAT Return for the whole group

2.4 Other features of group registration

These are:

• you will need to make sure that the representative member has all the necessary information to send a VAT Return for the group by the due date
• all members of the group are jointly and severally liable for the tax due from the representative member
• the partial exemption de minimis limits apply to the group as a whole and not the members individually read Partial exemption (VAT Notice 706)
• partially exempt groups can adopt practical or regulatory structures within the UK without incurring additional VAT costs — for example, setting up a service company that employs all staff, and operates the procurement, finance, human resources and other functions on behalf of all the companies in the VAT group
• the limit for voluntary disclosures of errors on past returns also applies to the group as a whole read paragraph 5.10
• the cash accounting limits apply to the group as a whole and not to the members individually
• the payment on account limits will apply to the group as a whole and not to the members individually read paragraph 5.9
• the general rules on the personal use of business assets apply equally to VAT group registrations — read VAT guide (VAT Notice 700) for more information
• if you have group members with fixed establishments in more than one location, that make supplies to other members of the VAT group, you may need to make a calculation in connection with section 43(2A) of the VAT Act 1994 read section 7
• if you have establishments (for example branches or head offices) overseas then you will need to be aware of the Skandia judgment and how it impacts on intra-group supplies read section 8

2.5 If you do not make any taxable supplies outside the VAT group

If one of the members is making taxable supplies that would make it liable or eligible for registration in its own right, then you may form a group. Unless you make taxable supplies outside the group, or make supplies outside the UK that would be taxable supplies if made in the UK, or make exempt financial or insurance supplies to customers outside the UK, you will not be eligible to recover any input tax. You must still submit VAT Returns even if these are nil returns.

2.6 Original VAT registration numbers

When a VAT group is registered, any previous VAT registration numbers that individual members may have had will be cancelled and a new number will be issued to the group as a whole. This number identifies the group as a taxable person and will remain unchanged, even if the membership is varied or the representative member is changed. This registration number must then be used by all the group members.

Similarly, if a group is disbanded, it will have the VAT registration cancelled and any members still liable to be registered, or if entitled, applying to be registered, will be re-registered and given new VAT numbers.

2.7 How EORI applies to VAT groups

An Economic Operator Registration and Identification (EORI) number is a unique number which is assigned by a customs authority to economic operators (businesses) or persons. In Great Britain (England, Scotland and Wales), that EORI number will start with the prefix GB and is issued under UK legislation. In Northern Ireland the EORI number will start with the prefix XI, is issued under EU legislation and can be used throughout the EU. You cannot get an XI EORI unless you already have a GB EORI.

Check if you need an EORI number and how to apply.

For EORI purposes, all members of a VAT group are treated as legal entities in their own right. But it is only group members who import or export commercial goods that will require an EORI number.

The representative member (that is the registered address of the VAT group as shown on the list of members of the group registration form 1050) will have the Group VAT number with a 000 suffix, whilst other group members who apply for an EORI number will have the same Group VAT number but a different suffix. If they need their EORI suffix to match their VAT group suffix they have the option to include this on their application (providing that suffix has not already been allocated — if the member has not informed the EORI team of their VAT group reference the next suffix number will be allocated to them).

2.8 Being in more than one VAT group

From 22 July 2004 an eligible person may only be in one VAT group at a time. If you’re already in more than one VAT group, you must inform us immediately.

2.9 The control conditions

The control condition is that all members of the group are controlled either by one member of the group, which can be a body corporate, an individual, a partnership or a Scottish partnership, or a single other ‘person’ who is not one of the members of the group.

Where control is exercised by a person that is a partnership that control must be exercised through the partnership and not by the partners as individuals. The company shares will normally be assets of the partnership.

You control a group member if any of the following apply:

• you’re a parent company of the group member within the definition in section 1159 of and Schedule 6 to the Companies Act 2006 (read section 11)
• you would be a parent company of the group member if you were a company
• you’re empowered by statute to control that body’s activities

If you cannot meet these conditions you will not be able to register as a group.

2.10 The eligibility conditions for specified bodies

Since 1 August 2004 ‘specified bodies’ must satisfy 2 extra conditions in order to be members of a VAT group. Read section 3 for the definition of ‘specified body’ and for details of the eligibility conditions. This only affects VAT groups with a turnover over £10 million per year.

2.11 How to apply for VAT grouping registration

Use the VAT50-51 form to apply for VAT group registration and upload it as part of your online application for registration.

More information can be found in who should register for VAT (VAT Notice 700/1).

2.12 Who should submit the application for registration

The application for registration which is completed for new group applications, must be signed or submitted by the representative member.

If you cannot register online, you will need to contact HMRC to request a form VAT1 Application for Registration. 

The VAT50-51 form, which is completed for each global group application should be signed by either the applicant company (the person making the application on behalf of the company) or the person controlling the group. This can be uploaded as part of your online application for registration.

2.13 Authorising an agent

If you want your accountant to register a VAT group or make changes to an existing group on your behalf you must inform HMRC of this using the VAT53 form. Information on the requirements and the extent of the authorisation is contained in the guide appoint someone to deal with HMRC on your behalf.

2.14 When to apply

You should apply as soon as possible to ensure registration by your preferred date. Your application will normally take effect from the date we get it or a specified later date. An earlier date may be agreed only in the circumstances explained in paragraph 2.22 and paragraph 2.23. In all cases though, we then have 90 days in which to make enquiries about your application and may reject it.

2.15 How we will let you know if we have accepted your application

We will write to you within 10 working days of getting your application to confirm the date the application was received.

2.16 The length of time any further enquiries may take

We have a total of 90 days from the date of receipt of your complete application to carry out any further enquiries. We will do our best to conduct our enquiries and advise you of the outcome as soon as possible. If we decide to refuse your application, it will be treated as if it had never been approved and effectively annulled.

2.17 What to do while you wait for a response to your application

If you are waiting for a response to your VAT grouping application, you should treat the application as provisionally accepted on the day it is received by HMRC and account for VAT accordingly. For more information on accounting for VAT in a VAT group read section 5. The date of receipt should be treated as, if sent online the date it was sent, or if it was posted the date it should be received by HMRC through the ordinary course of post.

If you have not been issued with a group VAT registration number, you cannot charge or show VAT on your invoices until it has been assigned. However, you’ll still have to pay VAT to HMRC for this period. You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoice showing the VAT. More guidance on this can be found in who should register for VAT (VAT Notice 700/1) section 5.1.

If you had a VAT registration number before your grouping application, you should not send returns under this number and should follow this guidance.

While you are waiting to receive your VAT grouping registration number, you may receive:

• an automated assessment letter
• letters asking for payment of any automated assessments
• notification of a late submission penalty because you have not filed your tax return
• notification of late payment penalties and late payment interest because you have not paid the automated assessments by the due date

If you do, you will not need to take any action in response to any of these notices because HMRC will automatically cancel them once your application is fully processed. HMRC will not take recovery action for any debts which come about as a result of you following this guidance, though other VAT debts may still subject to recovery actions.

2.18 When applications for group registration can be refused

We will refuse your application if you do not meet the conditions for group registration. We may also refuse any applications to form a new group or change or disband a group for the protection of the revenue (read section 4) where it appears to us that either:

• allowing the application would give rise to concerns over the safe collection of revenue due
• the application would facilitate VAT avoidance
• the revenue loss goes beyond the normal operation of grouping (read section 4)

2.19 What happens if HMRC refuses your application

If your application is refused, it will effectively be annulled and treated as if it had never been allowed in the first place. If you’re not satisfied with our decision, you can appeal to an independent VAT tribunal.

If you were registered for VAT before you applied for group treatment, your previous registration will be reinstated with effect from the date on which it was cancelled.

If, during the period that you were provisionally treated as a member of a VAT group, you would have been required to notify your liability to register for VAT, you will have 30 days after the date of the letter of refusal to register.

You may wish to apply to register for VAT on a voluntary basis after the group membership has been annulled if both:

• you were not liable to register at the time you applied for grouping
• you would not have become liable during the period when you were provisionally treated as a member of a VAT group (and so not legally obliged to register)

If, while your application was being considered to join a VAT group, the group submitted a VAT Return which included supplies made and received by you, the representative member will need to correct the return following our decision. Guidance on how to do this is in how to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

If an application is refused for group treatment, but none of the companies was previously registered, there may still be a requirement for you and the other companies within the group to register for VAT individually. You should register for VAT online. Read who should register for VAT (VAT Notice 700/1) for more information.

2.20 The name you will be registered under

The registration will be in the name of the representative member.

2.21 What to do if you do not receive a VAT number

If you have made an application and do not receive a new VAT number from us within 15 working days, you should contact VAT general enquiries immediately.

2.22 Backdating applications

You can backdate applications, but normally only up to 30 days prior to your application being received by us and only if it corresponds to the commencement of the current accounting period of either:

• the existing VAT group
• any of the eligible persons forming, joining or leaving the VAT group

So, if the commencement of the current accounting period is less than 30 days prior to your application being received by us, the maximum period of retrospection will be the beginning of that accounting period.

2.23 Backdating an application for more than 30 days

You can backdate an application for more than 30 days only in exceptional circumstances. Exceptional circumstances include, if:

• we lose your application and you can supply details of your original application and your attempts to follow it up
• the delay was caused by lack of action on our part

These examples are not exhaustive. We would not consider it an ‘exceptional circumstance’ where in hindsight you could have arranged things better if you had chosen to group earlier.

If the backdated application relates to unauthorised VAT group treatment, for example, businesses have been acting as a VAT group but they have not applied for or been granted group treatment, each application will be considered on its own merits.

2.24 How to add extra eligible persons to a VAT group, or remove existing members from a VAT group

You will need to complete the VAT50-51 form and provide us with all relevant information if you’re intending to add extra members or intending to remove existing members from a VAT group. Read section 6 for more details.

3. Specified bodies and the eligibility conditions

3.1 Introduction

Since 1 August 2004, certain bodies corporate, called ‘specified bodies’, have been required to satisfy 2 extra conditions in order to be members of a VAT group. This is to prevent partly exempt buyers of services setting up joint ventures within their VAT group, in order to buy in services without incurring irrecoverable VAT. The joint venture companies are in reality run by and for the benefit of third party suppliers, who exercise control over them in practice.

The following paragraphs describe who is a specified body and set out the 2 extra tests that such bodies must satisfy to be eligible to be within a VAT group. The body must satisfy both of these tests. The VAT Notice 700/2 flowchart should help you to determine whether you satisfy the eligibility conditions if you’re a specified body.

3.2 Specified bodies

A body corporate in or applying to join a VAT group is a ‘specified body’ if all the following apply, the:

• VAT group turnover exceeded £10 million in the last year or is expected to exceed £10 million in the coming year (read paragraph 3.4)
• body corporate concerned is partly owned by a third party, or the business activity is managed by a third party, or the body corporate is the sole general partner of a limited partnership (read paragraph 3.5 and paragraph 3.6)
• body corporate or limited partnership has a relevant business activity (read paragraph 3.10)
• body is not specifically excepted from being a specified body (read paragraph 3.7)

3.3 Eligibility conditions that apply to existing VAT groups

These conditions apply equally to VAT groups existing before 1 August 2004. If there are specified bodies in those groups who do not meet the conditions, they will have to leave the group from a date agreed with, or determined by, the Commissioners.

3.4 How ‘turnover’ is defined

Turnover is the value of all supplies made by the VAT group to persons outside the group, whether or not the place of supply is in the UK. It does not include intra-group supplies. This is the same as the definition for box 6 of the group VAT Return (read how to fill in and submit your VAT Return (VAT Notice 700/12)). The expected turnover for the coming year should be determined on the assumption that the body corporate is included in the group. If the body corporate is the sole general partner of a limited partnership, the limited partnership’s turnover is included (read paragraph 3.6).

3.5 Third parties

A third party is any person or partnership except:

• anyone who controls the whole VAT group (using the meaning of control described in paragraph 2.9), this includes both direct holding companies and indirect holding companies, all the way up to the ultimate controlling person
• anyone controlled by a person who controls the whole VAT group, this therefore includes all fellow subsidiaries
• any individual who is a director or employee of the body corporate
• where the body corporate is a limited liability partnership, any individual who is a partner in the partnership

Broadly speaking, any person outside the group that includes the VAT group is a third party, except individuals working for the body corporate itself.

3.6 What happens when the body corporate is the sole general partner of a limited partnership

Limited partnerships are included because for VAT purposes, a limited partnership’s business activities are treated as carried on by the general partner and so can be treated as taking place within the general partner’s VAT group.

The definition of a specified body is modified in 2 respects. First, the relevant business activity must be carried on by the limited partnership (not by the general partner in an unrelated capacity). Second, the expected turnover should take into account the limited partnership supplies to persons outside the VAT group.

3.7 Exceptions from being a specified body

The following are not specified bodies:

• a body corporate:
  • that controls all the other VAT group members
  • whose activities another body corporate is empowered by statute to control
  • whose only activity is acting as a trustee of an occupational pension scheme
• charities

3.8 What happens if the body corporate is dormant or has not yet started the business activity

A body corporate can only be a specified body when it is carrying on a relevant business activity, so the rules do not apply to dormant companies. A body corporate will be carrying on a business activity at any time that it makes a supply in the course of the activity, or when it is undertaking the work necessary to make the supplies.

3.9 If your corporate body is a specified body

You need to apply the 2 additional conditions on benefits (paragraph 3.11) and group accounts consolidation (paragraph 3.12) to determine whether the body can remain in or join the VAT group.

3.10 Relevant business activities

3.10.1 Definition of ‘relevant business activities’

A relevant business activity is one where the:

• business activity involves making supplies to other VAT group members
• supplies carry VAT, or would carry VAT if the body corporate was not in the VAT group (that is, they’re not exempt, zero-rated or outside the scope of UK VAT)
• supplies are not merely incidental to the business activity (read paragraph 3.10.2)
• VAT group cannot recover VAT in full on the supplies, or would not be able to do so if the body corporate was not in the VAT group

3.10.2 ‘Incidental’ supplies

‘Incidental’ has its normal meaning. In general, intra-group supplies are incidental to a business activity, if they’re occasional or minor supplies made in connection with the activity, they do not employ a substantial proportion of the resources devoted to the activity, and they’re not sufficiently separate from the main business activity to constitute a business activity in their own right. An example is occasional intra-group supplies made by a retailer whose business is mainly selling to the public.

3.11 Benefits condition

3.11.1 What the benefits condition is

The benefits condition will be satisfied if no more than 50% of the benefits generated by the business activity accrue to third parties (read paragraph 3.5). Broadly speaking, benefits cover the rewards obtainable from the good management or direction of the subsidiary. They do not include cost savings made by being a customer of the body corporate, such as price reductions, discounts or rebates. If the specified body is the sole general partner of the limited partnership, then the benefits concerned are those arising from the limited partnership’s business activity.

3.11.2 What the ‘benefits’ are for this purpose

Benefits include the following:

• the profits currently being earned by the business activity (whether these profits are later distributed to members, retained in the body corporate, or made available in some other way — for example by gift)
• any charges being made by anyone for managing the business activity that involves making intra-group supplies, or for providing staff for managing it — this does not include remuneration or bonuses paid to directors or employees of the body
• any other charges being made to the body corporate, but only insofar as they exceed open market value — this is intended to prevent the disguised distribution of profits in contrived situations, we do not expect traders in normal commercial relationships to undertake extra work to verify that transactions are at open market value

3.11.3 What’s meant by benefits ‘accruing’

Technically, the benefits condition applies at a particular time, but profits and charges are normally determined for a period (generally of one year for profits). They can be taken to accrue evenly over this period.

Profits ‘accrue’ to the persons who are expected to get the benefit of them in practice, taking into account all the circumstances. For example, such circumstances could include side agreements between shareholders, or a commitment or expectation that the profits would be gifted to a particular person.

Benefits can accrue indirectly. For example, if a third party owns 40% of the shares in subsidiary A and subsidiary A owns 100% of the shares in subsidiary B, then 40% of B’s profits will accrue to the third party. There is one exception to this, profits belonging to a holding company that controls the whole VAT group do not count as profits accruing to third parties, even if the holding company has shareholders who are third parties. This is because the condition is testing for benefits diverted away from the person controlling the VAT group.

3.11.4 What happens when ownership of a company changes during the year

This may depend on individual circumstances, but profits up to the point of change of ownership will normally accrue to the former owner (whether or not they’re ever distributed to them). Thereafter they will accrue to the new owner.

3.11.5 How management charges are treated differently from other charges

Management charges clearly represent a reward for managing the body’s business activity, and are often very closely linked to the profitability of the body. Also there are often great difficulties in establishing an open market value for such services.

3.11.6 How the benefits condition applies when there are no benefits

If there are no benefits because the business activity has not yet started, then the rules do not apply (read paragraph 3.8). If there are no benefits in other cases, you should consider what would happen if the business made nominal profits of £100.

3.11.7 How to apply the benefits condition when a new business activity starts

The benefit condition will only apply to specified bodies, and should be applied on the basis of each individual case. It should normally be clear who will get the benefits being generated by the business activity today and in what proportions, even if the exact level of the profits being earned is not known until the end of the specified body’s accounting period. There may be a few very unusual cases where profit distribution depends on profit level, but even in those cases the parties will usually have a fair idea of expected profit levels.

3.11.8 If the level of profits affects the proportions of benefits

In this situation, the specified body should apply the test according to current expectations of the outcome for the current accounting period. If the test is passed on this basis, but subsequently expectations change so that the specified body ceases to pass the test, then it will become ineligible for VAT grouping from the date that the expectations change.

3.12 Group account consolidation condition

3.12.1 What the group accounts consolidation condition is

The group accounts consolidation condition is satisfied if the following requirements are met:

• under generally accepted accounting practice (GAAP), a person controlling the VAT group consolidates the specified body as a subsidiary in his consolidated group accounts
• there is no third party (read paragraph 3.5) who under GAAP consolidates the specified body as a subsidiary in his consolidated group accounts

If more than one person controls the VAT group (for example there’s a series of holding companies), then the first requirement need only be met by one of them.

Where the specified body is the general partner of a limited partnership, then the consolidation condition applies to the limited partnership (for example the limited partnership must be consolidated as a subsidiary in the consolidated group accounts).

3.12.2 Generally accepted accounting practice

GAAP means the same as it does for Corporation Tax purposes. Consolidation for FRS 102 preparers is covered by chapter 9 of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Ireland’ and for FRS 101/IFRS preparers, IFRS 10 ‘Consolidated Financial Statements’.

3.12.3 What the standards require for consolidation as a subsidiary

The standards require unfettered ‘control’ of the specified body, with ‘control’ defined as being the ability to direct the financial and operating policies of the specified body with a view to gaining economic benefits from its activities. In particular, a specified body (even one that is treated as a subsidiary for Companies Act purposes) should not be consolidated as a subsidiary if, as a matter of substance and reality, control rests with a third party, or is shared with a third party (as in most joint ventures).

3.12.4 What happens if a specified body is not consolidated because it’s immaterial

Accounting standards do not apply to immaterial items, and it’s possible that for a large group the whole of the specified body’s results could be immaterial to the group accounts. In that case the consolidation condition looks at what would happen if the body’s results were material.

3.12.5 How HMRC will apply this condition in practice

The condition has to be applied at a current date, for which consolidated accounts will not yet have been prepared. In most cases the answer will be obvious or readily available from the most recent consolidated accounts, unless there has been some significant change in the specified body circumstances since then. In other cases we will normally accept a professional accountant or auditor’s statement that the specified body will be consolidated as a subsidiary in the accounts for the current period.

3.12.6 What happens when your group buys or sells a specified body

Under accounting standards, the specified body’s results will be consolidated in the group accounts from the date of purchase, or up to the date of sale. The consolidation condition will be satisfied for these periods only.

3.12.7 How the consolidation condition applies when the person controlling the VAT group does not have to prepare consolidated accounts

In practice, HMRC expects this to be rare for VAT groups over the £10 million turnover needed to have a specified body. It may happen if there is no company controlling the VAT group (for example, the only person controlling the VAT group is an individual or a partnership), or because the controlling company has a specific exemption from preparing consolidated accounts.

Under these circumstances, then you should look at what the position would be if consolidated accounts were prepared.

3.12.8 How bodies that are wholly owned (directly or indirectly) by an overseas holding company should apply the consolidation condition

The consolidation condition does not require that there is a UK holding company. It applies in exactly the same way to an overseas person controlling the VAT group. Increasingly overseas holding companies will prepare consolidated accounts to international accounting standards, and these can be used in testing the consolidation condition. Otherwise it may be necessary to consider what the position would be if consolidated accounts to UK or international accounting standards were prepared.

3.12.9 Flowchart for specified bodies

VAT Notice 700/2 flowchart (PDF, 42.7 KB, 1 page)

4. Protection of the revenue

4.1 The definition of ‘protection of the revenue’

The VAT grouping legislation gives HMRC the power to prevent a person joining a VAT group and to remove an existing member from a VAT group where this is considered necessary for the protection of the revenue.

We will not normally use our protection of the revenue powers when we consider that any revenue loss follows from the normal operation of grouping. We may consider this to be the case where the benefits from grouping exceed those listed in paragraph 2.2. If we feel that the revenue loss does not follow the normal operation of grouping then we would consider using our protection of the revenue powers.

In this context, ‘revenue loss’ means the VAT which is eliminated on the value added by a group member, when a supply takes place between 2 group members. This normally occurs only when one or more members of the VAT group are unable to deduct all the VAT they incur because they make exempt supplies.

One example of when we will consider applying our protection of the revenue powers is where it appears to us that the essential aim or primary benefit from VAT grouping a particular person is to disregard supplies from overseas establishments of that company to other VAT group members. This applies whether that person is established in the UK or has a UK fixed establishment.

4.2 How HMRC decides when to use the protection of the revenue powers

When deciding in any particular case whether to refuse a VAT group application, or to expel a person from a VAT group, using our protection of the revenue powers, we will bear in mind the decision in National Westminster Bank.

Paragraph 74 of that decision says, ‘the phrase ‘necessary for the protection of the revenue’ must be considered as a totality and involves a balancing exercise in which the Commissioners must weigh the effect on the appellant of refusal of grouping against the loss of revenue likely to result from grouping’.

If we have concerns that the revenue loss does go beyond the accepted consequence of VAT grouping, we will ask for relevant information about the administrative savings that grouping brings in the particular circumstances, and an estimate of the revenue impact of grouping. We will normally ask you to comment on the impact on your business of any refusal or removal on our part.

For example, you may incur extra costs in having to submit an extra VAT Return or in having to account for VAT on supplies between group members. The extent of these costs may be contingent on a number of factors, depending on how the group is set up and the systems and processes it uses.

The purpose of VAT grouping is to reduce administration and protect tax administrations from avoidance and evasion. It’s not to provide a tax saving to businesses, although that may be a consequence.

The cases in which HMRC will use the powers include those where the arrangements do not meet the purpose of VAT grouping to any meaningful extent and where there’s a significant VAT advantage.

This is likely to be the case where the supplies in the UK between the UK establishment and the other VAT group members are disproportionately small compared to the supplies between an overseas establishment and the other VAT group members (read the example in paragraph 4.1).

4.3 Removing a person from a VAT group when a revenue concern is identified

When a revenue concern is identified relating to an existing group member, we will write advising you that enquiries are being made and that the person may be removed from the group for the protection of the revenue. It’s in your interests to provide information quickly when asked to do so. Any failure to provide information may mean that factors are not taken into account which may affect the outcome of our considerations. We will let you know of the outcome of our enquiries as soon as they’re completed.

Where we use these powers we will only remove the group member or members necessary to protect the revenue and not disband the whole VAT group (unless the VAT group is only made up of 2 members).

4.4 Decisions and appeals

We will make a judgement based on the information that you provide, and any other information that we have. If you fail to provide the information that we ask for, we will endeavour to come to a balanced decision based on the information that we already have to hand, and the reasons you have given for not providing the information requested.

If we invoke our protection of the revenue powers we will write to you explaining why. If you disagree with our view you can appeal to the VAT and Duties Tribunal who can rule on whether our decision was reasonable in the circumstances.

5. Group registration — accounting for VAT

5.1 What happens if you make supplies to other members of the same VAT group

In most cases supplies of goods or services made between members of the same VAT group are disregarded for VAT purposes. This means that VAT need not be accounted for on these supplies and no VAT invoices must be issued in respect of them. But in certain circumstances supplies of services between group members cannot be disregarded — (read paragraph 5.2).

5.2 When VAT is due on supplies between group members

Supplies of some services between group members are not disregarded but are subject to a charge, known as the section 43(2A) intra-group charge. The services concerned are those to which the general rule for business-to-business supplies of services, covered in section 7A(2)(a) of the VAT Act 1994, applies. This general rule for the supply of services has been in effect since 2010. Details can be found in place of supply of services (VAT Notice 741A) from 1 January 2010).

There are special rules for valuing the section 43(2A) charge due on intra-group supplies of these services. Section 7 provides full guidance on when the charge is due and how you should calculate it.

Supplies of services between an overseas establishment of a member of a UK VAT group and members of the UK VAT group, including the UK establishment of the member itself making the supplies may be subject to VAT. This is as a result of the Skandia judgement. Section 8 provides guidance on when the supplies would be subject to VAT.

5.3 What happens if the group is partly exempt

As a group is treated as a single taxable person most of the partial exemption rules apply to a VAT group in the same way as they would to a stand-alone business. For example, the partial exemption de minimis limits apply to the group as a whole and not to the individual group members. You must remember that if you change the members of your group this may have a significant effect on any agreed special method and you should contact us to discuss any revisions or amendments needed.

We accept that there may be an advantage to businesses in creating a VAT group if they’re partly exempt. HMRC may use its protection of the revenue powers in situations where partly exempt VAT groups achieve an advantage (the revenue loss) which exceeds the normal operation of grouping (read section 4).

You can find more about partial exemption in partial exemption (VAT Notice 706).

5.4 Special rules for a partly exempt group acquiring a business as a going concern

If a partly exempt group acquires assets from a third party as part of a transfer of a business as a going concern there may be a requirement for the group to account for VAT on the assets. In these circumstances the representative member must treat the transfer as both a supply to and a supply by the representative member at the time the assets are transferred. Circumstances which will give rise to deemed supply are either, the assets:

• were owned by the previous owner for less than 3 years
• are standard-rated for VAT purposes
• are not capital items which fall under the Capital Goods Scheme

For more information refer to transfer a business as a going concern (VAT Notice 700/9).

5.5 How input tax recovery is treated within VAT groups

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

For example, if group member A buys in computer equipment and leases it to group member B, who uses the equipment to make exempt supplies to third parties outside the group, the input tax will be attributable to exempt supplies and restricted, subject to the normal de minimis limits.

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

5.6 Who is liable for the debts and obligations of the VAT group

Goods and services supplied to a group member by any third party outside the group are treated as having been made to the representative member. Similarly, any supplies made by a group member to a third party will also be treated as being made by the representative member.

Any goods brought into the UK by any member of the group will be treated as having been imported or acquired, if you are a business based in Northern Ireland, by the representative member and any tax due will be due from the representative member.

If the representative member is unable to meet a debt of the group each member will be held liable for the full amount of the debt until it is discharged. A former member of a VAT group will be held liable for tax that was due during a period of membership.

5.7 What happens if one of the members assumes a special status

In some cases the liability of a supply, acquisition or importation depends on the status of the supplier (for example, the provision of exempt education by an ‘eligible body’). In such cases, the VAT liability is determined by looking at the status of the person actually making the supply, even though for other VAT purposes the representative member is treated as making the supply. This also applies where the receipt of certain supplies depends on the status of the recipient (such as water, certain supplies to charities and the cost sharing exemption). In such cases, the VAT liability is determined by looking at the status of the person actually receiving the supply, even though for other VAT purposes the representative member is treated as receiving the supply.

5.8 The effect the Capital Goods Scheme has on VAT group treatment

If you acquire or own computer equipment or interests in land and buildings over a certain value, this will be subject to the Capital Goods Scheme provisions. The purpose of the scheme is to provide for adjustments to the input tax incurred (over a fixed period) to reflect the extent to which the item is used for taxable purposes.

Whilst any Capital Goods Scheme item is owned by a member of the VAT group, the capital item is considered to be owned by the representative member of the VAT group.

Normally, your Capital Goods Scheme adjustment intervals are the same as your VAT tax year. But these intervals can change if you join or leave a VAT group. For example, if you join a group, the current interval will end on the day before you join the group and any adjustment must be made on the final return of your old registration. The representative member of the group will take over the responsibility for any future adjustments. All remaining intervals will run for 12 months from the date you joined the group and remain fixed — even if you subsequently leave the group or join another group. Refer to Capital Goods Scheme (VAT Notice 706/2).

5.9 How the payments on account scheme works with VAT groups

Every VAT-registered business with an annual VAT liability of more than £2.3 million is required to make payments on account. Once in the scheme each business must make interim payments at the end of the second and third months of each quarter. These are payments on account of the quarterly VAT liability. A balancing payment for the quarter (that is, the quarterly liability less the payments on account made) is then made with the VAT Return. The payments on account and the balancing payments must be made by electronic transfer and the monies must be in HMRC’s bank account by close of business on the due date. It’s the VAT liability of the group as a whole that determines inclusion within the scheme. VAT payments on account gives more information.

5.10 Errors made on VAT Returns

The person responsible for completing the group’s VAT Return must be informed of any misdeclarations made by any other members of the group since joining it, and either:

• enter the amount to the group’s VAT account
• if necessary, make a single voluntary disclosure on behalf of the whole group

Since a VAT group is treated as a single taxable person, the limit for voluntary disclosures of errors on past VAT Returns applies to the group as a whole.

If you fail to make a voluntary disclosure of misdeclarations you may render the group liable to a misdeclaration penalty as well as interest.

Read how to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

5.11 Late submission penalties

Penalties for late submissions are calculated on the basis of points. For VAT groups the representative member has a single liability for these points covering the whole group. If the representative member changes, the existing liability is transferred to the new representative member.

A new member joining the group will not affect the points total of the group, even if the member joining had points before. If someone leaves the group and registers for VAT separately they will start with zero points, even if the group that they left had a penalty point balance.

For divisions, each one is liable for its own separate points and penalties. Each division will have its own maximum points total.

Read VAT penalties and interest for more information.

6. Changes in the group’s circumstances

6.1 Making changes to the group

You can:

• include additional members in an existing group
• remove members from an existing group
• change the representative member
• disband the group altogether

We will process your application with effect from the date on which we received it. We will write to you within 10 working days of receiving your application confirming the date of receipt, and either let you know that your application has been approved, or that further enquiries are required to check the circumstances of your application. We have a total of 90 days from the date of receipt of your application to complete any further enquiries (read paragraph 2.16).

We will refuse any application to include a member that does not satisfy the conditions for being in the VAT group, and we may refuse any applications if we consider it necessary ‘for the protection of the revenue’ (see section 4).

6.2 What happens if a member of a group ceases to satisfy the conditions for VAT grouping

You should notify us within 30 days of the change of eligibility.

If we find that a member of a group no longer satisfies the conditions for VAT grouping, we will issue a notice under section 43C(3) of the VAT Act 1994 directing that the company be excluded from the group. A notice issued will normally take effect on the date requested by the VAT group, unless we believe an earlier or later date is appropriate to prevent VAT avoidance. The date cannot be earlier than the date on which the group member ceases to be eligible to be in the VAT group.

Any specified body which ceased to satisfy the conditions for VAT grouping following the 1 August 2004 changes as a result of failing the benefits condition (paragraph 3.11) should also make a VAT avoidance scheme disclosure to HMRC. Read disclosure of VAT avoidance schemes (VAT Notice 700/8) for details of how to make a disclosure.

6.3 Forms you will need to use

Complete VAT50-51 form to:

• add a new member for each batch of applications
• exclude a member for each batch of applications
• change the representative member if they are not already a group member — you’ll also need to complete the VAT56 form
• disband the group for each member of the group to be excluded

6.4 What happens if a group is disbanded

When a group is disbanded, the group VAT registration number will be cancelled. Any members who are still liable or wish to register voluntarily will need to register for VAT again to get a new registration number.

6.5 HMRC changing the make-up of a group

HMRC has the powers to change the composition of a VAT group under sections 43C(1), 43C(3) and Schedule 9A of the VAT Act 1994. The powers can also be applied where the movement in or out of the group arises from a change in group eligibility legislation. These powers target VAT avoidance schemes which rely on moving companies into or out of VAT groups in order to get excessive input tax deductions that relate in part to disregarded intra-group supplies.

Section 43C(1)

HMRC can direct that a member of a VAT group be removed from that group, where it appears that the continued inclusion of the company in a VAT group presents a risk to the revenue.

Section 43C(3)

HMRC can direct that a member be removed from a group if it is not, or has ceased to be, eligible to remain in the group. A direction issued under this provision can have effect retrospectively from the date on which the group member ceased to be eligible.

Schedule 9A

Furthermore, Schedule 9A gives HMRC powers to counter the use of VAT group treatment for tax avoidance purposes. Provided that certain conditions are met, we can issue notices of direction to:

• include a person in a VAT group (providing that the person is eligible to be treated as a member of the VAT group)
• exclude a person from a VAT group
• re-regard a disregarded intra-group supply

These powers target tax avoidance schemes, which rely on the ability to move persons in and out of VAT groups resulting in the group, or associated persons, being able to claim input tax to which they’re not entitled.

7. Section 43(2A) intra-group charges on supplies of services

7.1 Introduction

Whilst section 43(2A) of the VAT Act 1994 was introduced to combat VAT avoidance arrangements under which overseas establishments of VAT group members would arrange to receive services and then on-supply them to UK members of the VAT group without a VAT charge, it’s not restricted to tax avoidance schemes of that sort and has always applied to all relevant transactions, regardless of their subjective purpose.

Although it’s normally the case that supplies between VAT group members are disregarded for VAT purposes, when a UK VAT group acquires certain services through an overseas establishment of a member of the same VAT group, a VAT charge (also known as a ‘reverse charge’) is due by virtue of section 43(2A) to make sure that the services are correctly taxed in the UK. This means that the VAT group has to account for output tax on the appropriate value of the supply. Any corresponding input tax can be simultaneously recovered subject to normal rules.

Section 43(2A) brings the whole of the supply to the VAT group member into charge. Paragraph 8A of Schedule 6 of the VAT Act 1994 allows the value of the supply to be reduced to the amount that is the sum of the bought-in services that are used in the making of the onward supply. The Commissioners need to be satisfied that all bought-in services have been identified for this valuation provision to apply.

Where HMRC believes the overseas member purchased those services valued less than their open market value, it may make a direction that they shall be valued at their open market value.

The following paragraphs give details of when a section 43(2A) charge is due and how it should be calculated.

7.2 Definitions of terms used in this section

This section uses several terms that have established VAT meanings. This paragraph gives guidance on what they are.

7.2.1 ‘Bought-in’ service

A bought-in service is a supply of a service that:

• would be taxable in the UK if made to a business belonging in the UK
• is received by the overseas establishment of a VAT group member
• is subsequently used to make a supply to the UK establishment of another member of the VAT group

Some common examples of bought-in services include:

• agency staff and other contract staff unless a secondment as detailed in supply of staff and staff bureaux (VAT Notice 700/34)
• telecoms
• legal and professional services
• software and other IT costs
• consultancy services
• advertising and marketing services

The section 43(2A) charge sets out to tax services bought-in by the business which, through an intra-group charge, become cost components of supplies made by UK establishments of intra-group members. It therefore addresses only bought-in services, so costs for wages and remuneration of the overseas establishment’s own directly employed staff, and internal mark-up (for example, cost plus, profit sharing) will not be bought-in services.

Under place of supply rules for services there is a general rule (in section 7A(2)(a) of the VAT Act 1994) and a series of exceptions (in Schedule 4A to the VAT Act 1994). The section 43(2A) charge only applies where bought-in services are received at the business’s overseas establishment under the general rule. Read place of supply of services (VAT Notice 741A) for more information on place of supply of services and paragraph 7.3.3.

7.2.2 ‘Cost component’ of a supply

Cost component is a partial exemption term to describe how costs are used within a business. Businesses incur costs and use them to make supplies to their customers. Not all costs will be directly used to make all supplies. A cost is a cost component of the price of a supply made if it is ‘directly and immediately’ linked to that supply, or if it is an overhead cost of the business as a whole.

Partial exemption (VAT Notice 706) provides more details on how to measure the use of costs and information on suitable proxies to use. An inappropriate proxy is unlikely to result in a fair calculation of the total value of all the bought-in services, in which case the Commissioners are unlikely to be satisfied as to the value.

7.3 Circumstances where a section 43(2A) charge is or is not due

7.3.1 When a charge is due under section 43(2A)

A section 43(2A) charge is due when the following circumstances exist:

• there’s an intra-group charge for supplies of services between group members which is disregarded for VAT purposes because of the VAT group (under section 43(1)(a) of the VAT Act 1994) and which would have been taxable if it had not been disregarded — an exempt supply to another member of the VAT group is not subject to a section 43(2A) charge
• the place of supply, again if not disregarded, would have been the UK under the general rule set out in section 7A(2)(a) — that is where the recipient group member belongs for VAT purposes — the charge does not apply where the place of supply is determined by one of the exceptions set out in Schedule 4A to the VAT Act 1994

Where the VAT group includes more than one member which has both UK and overseas establishments or fixed establishments, or one member with fixed establishments in a number of locations, then the whole chain has to be considered. The treatment is the same no matter how many transactions there are in the chain. Viewed as a single taxable person, the question is whether the VAT group has been provided with a bought-in service to one of its members at a place outside the UK, and whether it has been used to make a supply to a UK establishment of a different member in the VAT group.

For example, member A is established overseas and has fixed establishments in the UK and in 5 other locations. Those other locations provide services to the head office of member A, all including bought-in supplies, and those services are incorporated into an onward supply by member A to member B in the VAT group. When calculating the section 43(2A) charge, the use of all the bought-in costs in all the overseas locations of member A have to be considered.

Similarly, member A and member B both have an establishment or fixed establishments in the UK and overseas and are in a VAT group with member C. Member A makes a supply to member B overseas, which is used in an onward supply to member C. In calculating the section 43(2A) charge, the use of supplies purchased by both member A and member B overseas has to be considered.

A section 43(2A) charge is not only due for services that are invoiced. Some companies do not raise invoices within their corporate group. For example, the services may be notified by a ledger entry only. This would still require a section 43(2A) charge to be calculated.

7.3.2 Sales of goods from Great Britain to Northern Ireland, and within Northern Ireland, by members of a UK VAT group

UK VAT groups can continue to include members that are established in Northern Ireland as well as members that are established in Great Britain. However, there are a small number of changes to the way in which a VAT group will operate when they move goods from Great Britain to Northern Ireland, or where goods in Northern Ireland are sold between members.

Usually, supplies of goods between members of a VAT group are disregarded for VAT. This means that the group does not have to account for VAT on the supply. However, where goods are supplied between members of a VAT group, and those goods move from Great Britain to Northern Ireland, VAT will now be due in the same way as when a business moves its own goods.

Where supplies of goods are made between members of a VAT group, and those goods are located in Northern Ireland at the time that they are supplied, these will only be disregarded if both members are established, or have a fixed establishment, in Northern Ireland. Where one or both members only have establishments in Great Britain, the disregard will not apply and VAT must be accounted for by the representative member. This VAT may be reclaimed subject to the normal rules.

7.3.3 When a charge is not due under section 43(2A)

Normally there’s no VAT due on charges made between the headquarters of a company and one of its branches in the UK, and vice versa. The Court of Justice of the European Union (CJEU) decision in FCE Bank Plc c-210/04 explained that where a branch does not independently carry out its own economic activity but is dependent on its head office, they are to be considered a single taxable person. Supplies between the different parts of the same legal entity are disregarded for VAT.

There may be circumstances where a supply within an entity is recognised for VAT purposes, for example, where there is a supply to or from a country that operates establishment only VAT grouping rules (read section 8 on the Skandia judgement).

7.3.4 When the place of supply of a service is not set under the general rule

Under place of supply rules for services there’s a general rule (in section 7A(2)(a) of the VAT Act) and a series of exceptions (in Schedule 4A to the VAT Act) (read Place of supply of services (VAT Notice 741A)). The section 43(2A) charge only applies where bought-in services are received at the business’s overseas establishment under the general rule.

Some of the exceptions in Schedule 4A apply whenever a service is of the appropriate type. There are several ‘use and enjoyment’ rules that only apply when the place of supply would be different because of the application of the rule.

Where a service is covered under one of the exceptions then the place of supply is always set by Schedule 4A and not by the general rule. As a consequence, such services are never taken into account in calculating section 43(2A) charges. A prime example of such services is services related to land. Any services that come within the definition of services related to land can never be taken into account in section 43(2A) charge calculations.

Services which could be subject to a use and enjoyment provision will nonetheless have their place of supply set by the general rule when the use and enjoyment provision does not apply. Consequently, they may be taken into account in calculating section 43(2A) charges. Telecoms is an example of such services. Telecoms services used by an overseas establishment will be supplied there because that is where the recipient belongs and not because they’re used and enjoyed there. So, such services will be included in section 43(2A) charges.

7.4 When the section 43(2A) charge must be calculated

Where an intra-group supply is represented by a clear one-off charge then the section 43(2A) charge should be calculated on it immediately, but some supplies (and related charges) may be ongoing, possibly with quarterly estimates which are accurately calculated annually.

Where this applies, HMRC is content for section 43(2A) charges to be similarly estimated quarterly, and for the annual calculation to correct any over or under payment of tax that may have occurred. Where charges are genuinely annual, with no charges actually made within the group until the year end, the section 43(2A) charge will only be due annually.

7.5 If the value of the section 43(2A) charge is trifling

We consider the value of a section 43(2A) charge to be trifling where the amount due is less than £7,500 a year. The amount of £7,500 is for the output tax charged on the bought-in services, and the limit is applied to the group as a whole — this is in line with the current partial exemption de minimis limit. Where the amount is trifling we would accept that no charge needs to be accounted for. As a minimum, we expect a calculation to be done every 3 years to check that the charge is beneath the de minimis limit. However, you will need to make this calculation sooner if there is a business change within that time which might result in the charge being higher than the de minimis limit.

7.6 How the section 43(2A) charge must be calculated

The basic rule is that section 43(2A) brings the whole of the intra-group supply into charge, and paragraph 8A Schedule 6 of the VAT Act 1994 then allows the value to be replaced with the value of the bought-in services used to make that supply.

Having identified each intra-group supply, to calculate the value of the section 43(2A) charge you may consider taking the following steps.

Starting with the total value of the intra-group supply that would be taxable if not disregarded (steps 2 to 6 can be done in any order).

Step 1

Identify all the cost components of the intra-group supply.

Step 2

Exclude all cost components that would not be a supply of services if supplied separately, for example, incidental goods, regulatory fees, and so on.

Step 3

Exclude all cost components that would be exempt (if supplied in the UK).

Step 4

Exclude all cost components where the general place of supply of services rules would not apply.

Step 5

Exclude costs components of internal staff wages and remuneration.

Step 6

Exclude mark-ups (where these are added by the VAT group member making the supply, not the supplier of the bought-in service).

Step 7

What remains are bought-in services; the value of each is a ‘relevant amount’.

Step 8

Where the use of a single proxy does not accurately reflect the use of all the bought-in services that should be analysed and allocated on a separate basis, these should be excluded from the general calculation and the correct allocation added back.

Step 9

Add together all the relevant amounts for the intra-group supply. This is the amount that is subject to the charge under section 43(2A).

7.6.1 Examples to demonstrate the calculation of the charge

Member A has its head office overseas, a branch in the UK and another branch in country Y. It’s in a VAT group with member B. Member A makes 3 different supplies to member B.

Supply 1

Member A makes supplies of insurance to all companies in the group, as this is all purchased by member A. Although bought-in services have been used in making the supply, the supply to member B would be an exempt supply and therefore a section 43(2A) charge is not due.

Supply 2

Member A makes supplies of management services from the head office of member A to member B. Bought-in services are used in the making of the supply, therefore a section 43(2A) charge is due.

Calculating the section 43(2A) charge:

The head office of member A supplies management services to all companies and branches in the group, and makes no other supplies. It considers the costs it incurs are used proportionately across all the charges it makes, and for the supply to member B this equates to 5% of all its costs. In this instance 5% of each cost category are considered to be the cost components of the supply.

The total value of the supply to member B is £100 million. On analysing the cost components making the £100 million charge, £1 million is regulatory and other fees outside the scope of VAT, £3 million is purchases that would be exempt under Schedule 9, £5 million for property, electricity and other costs not subject to the general place of supply rules, £30 million of internal staff costs (salary, payroll taxes and pension costs) and £5 million mark-up on the supplies.

It considers that the remaining £56 million is the value of the bought-in supplies and a section 43(2A) charge applies to this amount. This amount includes £10 million of contract staff costs, but it recognises that these are bought-in services.

Supply 3

Member A makes supplies of IT support from its UK branch to member B, which includes services provided by member A from its branch in country Y. Member A purchased services in country Y which are used in the onward supply to member B, so a section 43(2A) charge is due.

Calculating the section 43(2A) charge:

For the supply from the UK branch of member A to member B, a similar calculation is done. The branch of member A in country Y only supports the UK branch and charges the UK branch £200 million. All of its costs are cost components of its supply to the UK branch.

The UK branch has calculated that it uses 60% of the services from the branch in country Y in its onward supply to member B, and 40% is used to support systems used to make other supplies. In this instance, 60% of each cost category of the branch in country Y are considered to be the cost components of the supply.

The total value included in the supply to member B is £120 million. On analysing the cost components making up the £120 million charge, £6 million were purchases that would be exempt if in the UK, £12 million were property, electricity and other costs not subject to the general place of supply rules, £60 million were internal staff costs (salaries, payroll taxes and pension costs) and £12 million is the mark-up, and so calculates that the section 43(2A) charge applies to the remaining £30 million as this is the total of the bought-in supplies. This £30 million includes £5 million of contract staff costs, the company recognises that these are bought-in services.

7.6.2 Apportionment

Where a bought-in service is used only in part for a supply to a member of the VAT group, a fair and reasonable apportionment should be made. In the example for supply 2, 5% of each bought-in supply is deemed to be fair and reasonable apportionment, and 60% in the example for supply 3.

Evidence must be retained of how this apportionment is made in order to satisfy the Commissioners of the value of the bought-in service (read paragraph 7.7).

7.6.3 Converting monetary amounts into sterling

Bought-in services may well be charged in currencies other than sterling. Indeed charges between VAT group entities may also be in currencies other than sterling. Because VAT must always be in sterling, calculations of section 43(2A) charges will require an amount in sterling that can be used to generate the VAT.

The business’s normal arrangements for converting currencies may be used as long as they’re consistently and rationally applied and are not designed to minimise section 43(2A) charges. If the business has no set policy then any meaningful, verifiable and independently compiled exchange rate may be used as long as it is consistently applied.

7.6.4 Option to use full value of intra-group supply

Instead of carrying out the calculation of bought-in costs, you may apply the section 43(2A) charge to the full value of the supply, effectively not applying the paragraph 8A Schedule 6 valuation provision.

In particular, you may prefer to do this if your business is fully taxable, and you can recover the section 43(2A) charge VAT in full.

7.7 Satisfying the Commissioners

In order to satisfy the Commissioners that the reduced value of the bought-in services may be applied, the business must be able to evidence all the components set out in paragraph 7.6. Evidence must be available for each period the section 43(2A) charge is due as set out at paragraph 7.4.

7.7.1 Difficulty in establishing the value of the components of the supplies

As an overseas establishment will always be a part of a member of the VAT group, and so under the same control as the representative member, it should be possible to obtain the necessary evidence over costs incurred overseas in order to calculate the section 43(2A) charges.

For services received an invoice is evidence as to value. HMRC will accept a range of other normal commercial evidence so long as it’s reasonably clear and there’s no reason to think that manipulation of values is occurring. If taxpayers are concerned whether their evidence is sufficiently clear to satisfy HMRC, they should contact HMRC through normal channels.

If the VAT group cannot evidence what the values of the bought-in services are then paragraph 8A of Schedule 6 will not apply and the value of the section 43(2A) charge will be calculated on the whole of the intra-group supply.

7.7.2 HMRC directions

When the VAT group has been able to evidence what the values of the bought-in services were, but HMRC believes that those services were undervalued, HMRC may direct that they shall be valued at their open market value under paragraph 8A(5) of Schedule 6. Any such direction must be made within 3 years of the intra-group charge to the UK that causes the section 43(2A) charge. This could include bought-in services incurred by the overseas establishment more than 3 years before the date of the direction.

If the VAT group cannot evidence what the values of the bought-in services are then paragraph 8A of Schedule 6 will not apply and the value of the section 43(2A) charge will be the same as the full intra-group charge. If HMRC believes that this value is less than the open market value of the intra-group supply, and if the other conditions required under that paragraph are met, HMRC may direct an open market value under paragraph 1 of Schedule 6.

7.8 Overseas branches but no VAT group

Although the charge requires a member with establishments in both the UK and overseas, it does not apply simply because there is an overseas branch, but requires a VAT group and the other circumstances set out in paragraph 7.3.

Where there is a separately registered UK body that has an overseas branch then no section 43(2A) charges can arise under this provision. However, if costs are billed to the overseas branch but used in the UK then a normal reverse charge may arise under section 8 of the VAT Act depending on circumstances. Read the reverse charge guidance in the HMRC VATPOSS14000 manual.

7.9 Double taxation

Section 43(2A) applies even if it causes double taxation. HMRC recognises double taxation could occur particularly where a deduction for input tax on costs incurred overseas is not permitted by the overseas tax jurisdiction, however you must still calculate the value of the section 43(2A) charge.

8. VAT rules and the Skandia Judgment

8.1 Background

Skandia America Corporation had a head office in the United States and a fixed establishment in Sweden, and believed that supplies made to its Swedish branch were intra-company transactions and consequently not subject to VAT. The Swedish tax authority disagreed, and following referral to the CJEU a judgement was passed that under the Swedish grouping provisions only the establishment physically located within Sweden could belong to a Swedish VAT group. Therefore Skandia America Corporation would be liable to pay VAT on its supplies to its Swedish branch, and the Swedish VAT group would have to account on VAT for those services under the section 43(2A) charge.

The UK’s VAT grouping provisions in contrast bring the whole person into the VAT group, and consequently supplies between an overseas establishment and a UK establishment of the body are not normally supplies for UK VAT purposes, as they’re transactions within the same taxable person.

This has not changed following the decision as the court did not consider the UK’s rule, however in some circumstances the UK VAT accounting will change.

8.2 UK VAT accounting resulting from the judgement

The implication of the Skandia judgment is that an overseas establishment or fixed establishment of an entity that also has a UK-establishment or fixed establishment is part of a separate taxable person if the overseas establishment is VAT-grouped in a member state that operates similar ‘establishment only’ grouping provisions to Sweden.

Furthermore, the effect of their VAT grouping rules is that the part of the entity physically located in that country becomes part of the VAT group there, and is no longer part of the single taxable person of the entity’s head office and branches.

This will be the case whether or not the entity in the UK is part of a UK VAT group. Businesses must treat intra-entity services provided to or by such establishments as supplies made to or by another taxable person and account for VAT accordingly:

• services provided by the overseas VAT-grouped establishment to the UK establishment will normally be treated as supplies made in the UK under place of supply rules, and subject to the section 43(2A) charge if taxable
• services provided by the UK establishment to the overseas VAT-grouped establishment will normally be treated as supplies made outside the UK under place of supply rules — therefore they will need to be taken into account in ascertaining input tax credit for the UK establishment — if the supplies are section 43(2A) charge services, they should be reported on the trader’s European Sales Listing of such supplies

If the UK entity is in a UK VAT group, the same applies to supplies between the overseas establishment and other UK VAT group members in UK. Under these circumstances the legislation in VATA section 43(2A)-(2E) does not also apply, as the overseas establishment is not seen as part of the UK VAT group.

It’s the responsibility of individual businesses to adhere to local VAT grouping rules where they operate outside of the UK and to assess how it applies to their own particular circumstances.

9. Divisional registration

9.1 How divisional registration works

Each of the divisions of a single corporate body is separately registered, given their own VAT registration numbers and allowed to submit their own VAT Returns.

9.2 Divisional registration

Divisional registration is not an automatic right. Your application will be approved only if we’re satisfied that there would be real difficulties in submitting a single VAT Return for the corporate body as a whole within 30 days of the end of your tax period.

9.3 Who can register as a division

Only bodies corporate can register in divisions under section 46(1) of the VAT Act 1994.

9.4 What a division is

We consider a corporate body is trading in divisions if:

• it has 2 or more branches, sites or departments which are self-accounting units in the UK
• the branches, sites or departments carry out different functions or trade in different geographical areas, and have their own independent accounting system

9.5 Requirements for divisional registration

You may be approved as a divisional registration only if:

• all divisions are registered, even those whose turnover does not go over the VAT registration threshold
• all the divisions must be independent units with their own accounting systems and must:
  • operate from different geographical locations
  • be supplying different commodities
  • be carrying out different functions, for example manufacture, export or retail
• the whole corporate body must be, or be treated as being, fully taxable (the corporate body can be treated as fully taxable if the exempt input tax it incurs is below the de minimis limits set out in partial exemption (VAT Notice 706), the de minimis limits apply to the corporate body as a whole, not to each division)
• all divisions must send in VAT Returns for the same tax periods, we will normally advise you what these periods are, but you can apply for non standard periods if you wish

9.6 How to apply

To register divisions or business units of your company for VAT you need to:

• complete the VAT1 form for each division or business unit
• explain in detail, in a letter, why it’s difficult for you to submit a single VAT Return for the company
• provide evidence that your company is incorporated, for example incorporation certificates

Divisional registrations cannot currently be completed online, but you can call HMRC to request a paper version of VAT1 to register your business units or divisions for VAT. The paper forms must be completed and then sent with your supporting documentation to HMRC.

9.7 Backdating an application

Applications will normally only be accepted from a current date, unless there are exceptional circumstances that require an earlier date.

9.8 How each division is taxed separately

Each division is not taxed separately, even though each division is VAT-registered separately the corporate body is still a single taxable person. Therefore the corporate body as a whole remains liable for the VAT debts of all the divisions.

9.9 Divisional registration restrictions

Divisional registration is not restricted to UK companies. A corporate body, which is constituted outside the UK, may apply for divisional registration provided that it has at least 2 self-accounting units in the UK and it can comply with the divisional registration conditions in paragraph 9.5.

One of the divisions in the UK is deemed to cover the activities of those divisions or sites which are outside the UK so that, if any of those overseas sites start making taxable supplies in the UK, tax is accounted for on those supplies by the UK-based division covering for them.

9.10 If your company is part of a VAT group

You cannot combine divisional and group registration. Paragraph 1.5 gives more information.

9.11 Adding new divisions and removing existing ones

If you wish to register other divisions, you should apply, following the steps in paragraph 9.6. If your company has a divisional registration and you sell off or close down one of the divisions, you should inform HMRC in writing. That division will then be removed from the divisional registration of the body corporate.

9.12 What happens if your company no longer meets the conditions

If you can no longer meet the requirements in paragraph 9.5 you should write to us within 30 days of the changes taking place. A decision will then be taken on whether the divisional registration should be allowed to continue.

If the divisional registration is cancelled for the corporate body as a whole then, if it is still liable to be registered, the single VAT registration must cover all the taxable business activities of the body corporate as a whole.

9.13 Issuing invoices

You must not issue tax invoices for transactions made between divisions of the same corporate body. These are not considered to be supplies for VAT purposes.

9.14 Tax periods

You cannot choose different tax periods for different divisions. All your divisions will need to have the same tax period. This is normally allocated by HMRC. If you expect the whole body corporate to be in a repayment position, the divisions may be allowed to render monthly returns. But where this is allowed, all the divisions must render monthly returns.

9.15 Special tax periods

You can request special tax periods for the whole company. You must write to HMRC to request special tax periods for the body corporate as a whole.

10. Definitions of terms

10.1 Body corporate

A body corporate is a form of corporation. This is a number of people united and consolidated together and considered to be one person in law. Corporations are either aggregate (bodies corporate) or sole.

Type of corporation	Which includes	For example
Body corporate	a number of people united and considered to be one person in law	The mayor of a town or city and its commonality A company
Corporations sole	1 person only	King or Queen Bishop or Vicar

10.2 How a body would be incorporated

There are several ways in which a body may be incorporated. The table shows 5 types of companies incorporated under the Companies Acts.

Type of body	limited by
public limited company	either shares or guarantee with a share capital
private companies	shares
private companies	guarantee with a share capital
private companies	guarantee
unlimited companies	—

10.3 Other ways

These are:

Incorporated by	For example the
A specific Act of Parliament for a named body	National Coal Board (incorporated by the Coal Industry Act 1954 to the Coal Industry Act 1990) Post Office (incorporated by the Post Office Acts 1969 to 1977)
Acts of Parliament for an entire class of body	Building Societies Act 1986 Police and Magistrates Courts Act 1994 Further and Higher Education Act 1992 Limited Liability Partnership Act 2000
Royal Charter	British Broadcasting Corporation (BBC) Institute of Directors
Company Law of another country	German GmBH American Corp

10.4 What the terms establishment and fixed establishment mean

Establishment

The place where you have established your business and the main functions of the business’ central administration are carried out. This will usually be the head office, headquarters or ‘seat’ from which the business is run. This is where essential day-to-day decisions concerning the general management of the business are taken. A registered office alone is not sufficient to create an establishment.

A company or partnership will, generally speaking, be ‘established’ in only one country.

An individual is established where they are resident for income tax purposes.

Fixed establishment

A company or partnership has a ‘fixed establishment’ in the UK if it has a real and permanent trading presence in the UK. For example, if either it has a:

• permanent place of business which has sufficient permanent human and technical resources to carry on one or more of the business activities of the company as a whole and makes supplies directly from the UK establishment
• branch or office in the UK, which has sufficient permanent human and technical resources to carry on one or more of the business activities of the company as a whole and makes supplies directly from the UK establishment

A company does not have a ‘fixed establishment’ in the UK purely by virtue of the fact that it:

• is incorporated and has its registered office in the UK
• has a:
  • simple brass plate presence in the UK
  • UK based agent

An individual has a fixed establishment where they have sufficient permanent human and technical resources to carry on one or more of their business activities and make supplies directly from the UK establishment. For example, an individual resident in France also runs a nursing home in the UK. The individual employs the staff directly and owns (or leases) the property.

In this instance, although the individual is resident in France, they have a fixed establishment in the UK as they are making supplies to the residents of the nursing home using the human and technical resources they employ or own in the UK.

It is not enough for the fixed establishment to merely receive supplies, it also needs to make supplies. This is based on CJEU decisions such as Planzer (C-73/06, para 54) and Welmory (C-605/12, para 59-63) which indicate that a fixed establishment must be capable of making supplies in the course of the company’s business activity, not just capable of receiving supplies.

10.5 Specified bodies

Definitions concerning specified bodies are set out in section 3.

11. Extract of relevant Companies Act Legislation

Companies Act 2006 section 1159 and Schedule 6

1159 Meaning of ‘subsidiary’

(1) A company is a ‘subsidiary’ of another company, its ‘holding company’, if that other company:

(a) holds a majority of the voting rights in it, or

(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company

(2) A company is a ‘wholly-owned subsidiary’ of another company if it has no members except that other and that other’s wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries.

(3) Schedule 6 contains provisions explaining expressions used in this section and otherwise supplementing this section.

(4) In this section and that Schedule ‘company’ includes any body corporate.

Schedule 6 Meaning of ‘subsidiary’, supplementary provisions

Introduction

1 The provisions of this Part of this Schedule explain expressions used in section 1159 (meaning of ‘subsidiary’) and otherwise supplement that section.

Voting rights in a company

2 In section 1159(1)(a) and (c) the references to the voting rights in a company are to the rights conferred on shareholders in respect of their shares or, in the case of a company not having a share capital, on members, to vote at general meetings of the company on all, or substantially all, matter.

Right to appoint or remove a majority of the directors

3 (1) In section 1159(1)(b) the reference to the right to appoint or remove a majority of the board of directors is to the right to appoint or remove directors holding a majority of the voting rights at meetings of the board on all, or substantially all, matters

(2) A company shall be treated as having the right to appoint to a directorship if:

(a) a person’s appointment to it follows necessarily from his appointment as director of the company, or

(b) the directorship is held by the company itself

(3) A right to appoint or remove which is exercisable only with the consent or concurrence of another person shall be left out of account unless no other person has a right to appoint or, as the case may be, remove in relation to that directorship.

Rights exercisable only in certain circumstances or temporarily incapable of exercise

4 (1) Rights which are exercisable only in certain circumstances shall be taken into account only:

(a) when the circumstances have arisen, and for so long as they continue to obtain, or

(b) when the circumstances are within the control of the person having the rights

(2) Rights which are normally exercisable but are temporarily incapable of exercise shall continue to be taken into account.

Rights held by one person on behalf of another

5 Rights held by a person in a fiduciary capacity shall be treated as not held by him.

6 (1) Rights held by a person as nominee for another shall be treated as held by the other.

(2) Rights shall be regarded as held as nominee for another if they’re exercisable only on his instructions or with his consent or concurrence.

Rights attached to shares held by way of security

7 Rights attached to shares held by way of security shall be treated as held by the person providing the security:

(a) where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with his instructions, and

(b) where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in his interests

Rights attributed to holding company

8 (1) Rights shall be treated as held by a holding company if they are held by any of its subsidiary companies.

(2) Nothing in paragraph 6 or 7 shall be construed as requiring rights held by a holding company to be treated as held by any of its subsidiaries.

(3) For the purposes of paragraph 7 rights shall be treated as being exercisable in accordance with the instructions or in the interests of a company if they are exercisable in accordance with the instructions of or, as the case may be, in the interests of:

(a) any subsidiary or holding company of that company, or

(b) any subsidiary of a holding company of that company

Disregard of certain rights

9 The voting rights in a company shall be reduced by any rights held by the company itself.

Supplementary

10 References in any provision of paragraphs 5 to 9 to rights held by a person include rights falling to be treated as held by them by virtue of any other provision of those paragraphs but not rights which by virtue of any such provision are to be treated as not held by them.

12 Right of appeal to the VAT and Duties Tribunal

You have the right to appeal to the VAT and Duties Tribunal against:

• the refusal of any application given under section 43B
• any notice of direction given under section 43C
• any notice of direction given under paragraph 1 of Schedule 6
• any notice of direction given under Schedule 9A

But, the allocation or re-allocation of registration numbers to or from VAT groups is not an appealable matter.

Your rights and obligations

Read HMRC Charter to find out what you can expect from HMRC and what we expect from you.

Help us improve this notice

If you have any feedback about this notice email: customerexperience.indirecttaxes@hmrc.gov.uk.

You will need to include the full title of this notice. Do not include any personal or financial information like your VAT number.

If you need general help with this notice or have another VAT question you should phone our VAT helpline or make a VAT enquiry online.

Putting things right

If you’re unhappy with HMRC’s service, contact the person or office you have been dealing with and they will try to put things right.

If you’re still unhappy, find out how to complain to HMRC.

How HMRC uses your information

Find out how HMRC uses the information we hold about you.

Published 8 August 2014
Last updated 25 January 2024 + show all updates

1. 25 January 2024

   The list of notifications you may receive while waiting for your VAT grouping registration number, has been updated at section 2.17. A new section about late payment submission penalties has been added at section 5.11.

2. 8 December 2023

   Information on what happens if HMRC refuses your application and how to request a paper VAT1 form has been updated.

3. 13 February 2023

   Information about exempt financial or insurance supplies to customers outside the UK or the EU if you are a business in Northern Ireland has been removed from section 2.5. Section 7.5 has been updated to make it clear the amount of £7,500 relates to the output tax, and applies to the whole group.

4. 18 May 2022

   More information has been added to section 7.3.2 about sales of goods by members of a UK VAT group.

5. 2 March 2022

   Revised guidance on what to do while you are waiting for a response to your VAT grouping registration.

6. 13 September 2021

   To register a VAT group you now only need to include the VAT50/51 form with your application.

7. 31 December 2020

   This page has been updated because the Brexit transition period has ended.

8. 26 November 2019

   This notice has been updated to include information about the legislative changes to the eligibility criteria to include certain non-corporate entities, which are individuals, partnerships and Scottish partnerships. These changes are in line with provisions in Finance Act 2019 coming into force and take effect from 1 November 2019.

9. 19 March 2019

   As announced at Budget 2018, HMRC has revised existing guidance for VAT groups to clarify which overseas services can be classified as bought-in services to ensure that such services are subject to UK VAT. Other changes include clarification of our existing policies and changing the limits where the amount is trifling. This notice has been updated accordingly. These changes take effect from 1 April 2019. Further updates will be required at a later date to reflect the legislative changes to the eligibility criteria to include UK bodies corporate and relevant persons once the relevant provisions in the Finance Act 2019 come into force.

10. 8 August 2014

    First published.