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HMRC internal manual

VAT Groups

HM Revenue & Customs
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Eligibility conditions for specified bodies: benefit conditions

What is the benefits condition?

The benefits condition will be satisfied if no more than 50% of the benefits generated by the business activity accrue to third parties (see VGROUPS03210). 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.

What are “benefits” 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 - e.g. 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.

What is 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. However, 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.

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 are ever distributed to him). Thereafter they will accrue to the new owner.

Why are management charges 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.

How does the benefits condition apply when there are no benefits?

If there are no benefits because the business activity has not yet started, then the new rules do not apply (see VGROUPS03270). If there are no benefits in other cases, you should consider what would happen if the business made nominal profits of £100.

How does the benefits condition apply 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.

What 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.