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HMRC internal manual

Business Income Manual

Specific receipts: refunds of sums paid as VAT: VAT groups

This is direct tax guidance; for indirect tax guidance, refer to VAT Guidance.

This section is intended to provide an overview of the VAT legislation for people working in direct tax only.

Companies can choose to be members of a VAT group. A VAT group exists solely for VAT purposes; it has no wider applicability, including for direct tax purposes.

This was confirmed by Asplin J in Shop Direct Group v HMRC [2013] UKUT 0189 (TCC) where she said at paragraph 67of her judgment:

‘In my judgment, the onward transmission of the repayment by the current representative member of the VAT group which for administrative ease receives the repayment from HMRC, to the trader or successor to the trade by which the original overpayment was generated, cannot strip the repayment of its nature or character. The onward transmission by the representative member is just that and is rendered necessary by the statutory fiction of the VAT group.’

For the purposes of VAT legislation, a VAT group is deemed to be a single entity, represented by the VAT registration number. Similar arrangements also exist elsewhere in the tax system, such as in Insurance Premium Tax, and one company could be a member of several differently constituted groups for different taxes.

The VAT group continues in existence even though over time its membership changes with some or all of the companies that originally made up the VAT group leaving or ceasing to exist. Because a corporate group can choose which companies to include in a VAT group, it is possible for a company to be removed from a VAT group even where the company in question has not left the corporate group.

A VAT group has to have a ‘representative member’, which acts on behalf of the VAT group as a whole. For the purposes of VAT legislation:

  • any business within the charge to VAT carried on by a member of the VAT group is treated as carried on by the representative member;
  • any purchases by a member of the VAT group are treated for the purposes of the VAT legislation as purchases by the representative member; and
  • any sales by a member of the VAT group are treated for the purposes of the VAT legislation as sales by the representative member.

Importantly, however, all members of the VAT group are treated as jointly and severally liable for any VAT due from the representative member.

The company acting as representative member can be changed where appropriate by an administrative procedure without affecting the existence of the VAT group.

Under VAT legislation, the entity actually entitled to a refund of the sum originally paid as VAT is the representative member of the VAT group. The claim would be made on behalf of the VAT group by the company currently acting as representative member for the VAT group. This can be a different company to that which acted as representative member when the relevant payment(s) was originally made.

Companies leaving a VAT group

When a company leaves a VAT group, through sale or dissolution, the right to receive any subsequent refunds of sums paid as VAT relating to the period when the company was in the group remains with the VAT group.

But you should be aware that where a company is sold, the sale agreement is likely to contain specific provisions setting out how any payments or repayments (including refunds) relating to VAT will be dealt with. Commonly these take the form of a ‘tax deed’ (or covenant, or indemnity) under which the seller undertakes to meet any pre-sale tax liabilities and to make good any tax benefits the purchaser expected under the terms of the sale but which do not in the event materialise. Repayments (including refunds) from HMRC are commonly dealt with by set off against the seller’s liability. You should establish the agreed terms and take them into account in deciding who is taxable on the refund.

BIM40172 sets out examples of how refunds to a company forming part of a VAT group are dealt with for direct tax purposes.