Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Accounting Manual

HM Revenue & Customs
, see all updates

Examples and letters: examples of when consideration should be given to issuing a direction under Regulation 25



This section is referred to at VATAC5100.

The following are three examples of circumstances where consideration should be given to issuing a direction. The list is illustrative, but not exhaustive.

Example 1

Two companies that are not connected (within the meaning of Section 839, ICTA 1988) but trade closely with one another. Company A supplies a significant proportion of the goods that company B sells on.

Company A is on stagger 1 and company B is on stagger 2. Company A invoices for each quarter’s goods, in advance, on the first day of each VAT period (1 April, 1 July, 1 October and 1 January). Company B recovers this as input tax on the last day of their respective VAT returns (30 April, 31 July, 31 October and 31 January). The VAT invoiced per quarter is £100,000 on average with no suspicion that the supplies are overvalued.


In this case, despite there being no overvaluation of goods and both companies A and B having substance, there is unlikely to be any commercial reason for company A to invoice for its supplies three months in advance on the first day of their VAT quarter other than to improve cash flow. Subject to any submissions the business puts forward, company B should be directed onto the same stagger as company A, since it is company B that is gaining the tax advantage.

Example 2

Company C supplies goods to company D for export. Company C is on stagger 1 and company D is separately registered and on monthly returns always being in a repayment position. Company D is a wholly owned subsidiary of company C. Company C raises invoices during the first month of each quarter for goods to be supplied during that quarter. The goods are not overvalued.

Company C raises an invoice on 15 April. This will be declared and paid on their June return that is due on 31 July. Company D claims this input tax on their return for the period ending 30 April that they submit on 1 May. A repayment is received on 15 May from HMRC. In this case, company D has the cash at least two and a half months before company C pays it over.


Since company D is wholly owned by company C, it is likely that they share the same premises, staff, accounting system etc. Even if they do not, the current arrangements allow a cash flow benefit of at least two and a half months and company D serves little commercial purpose other than to facilitate this cash flow benefit.

Action should be taken to remove the facility for monthly returns from company D (see point f of VATAC5100), again subject to any submissions from the businesses concerned. Alternatively, if both parties agree, company C could be directed onto monthly returns.

Example 3

Two unconnected companies where company E is on stagger 1 and company F on stagger 2. Company E sells a property to company F for five times its value. The timing of the transaction allows company F to recover the input tax two months before company E accounts for the output tax.


Clearly an overvaluation of the supply has taken place here and, unless there is some good reason why the value was so set, a direction should be issued. Company F should have its returns brought in line with company E if the return period has ended in which the input tax was recovered. In these circumstances, a direction could be issued on company E to bring forward the time at which they must account for output tax (assuming this has not also passed). If a direction is made to company E, company F should have their tax stagger aligned unless you are satisfied that there will be no recurrence.