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HMRC internal manual

VAT Groups

Eligibility conditions for specified bodies: group account consolidation condition

What is the group accounts consolidation condition?

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 (see VGROUPS03210) who under GAAP consolidates the specified body as a subsidiary in his consolidated group accounts.

If more than one person controls the VAT group (e.g. there is 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 (e.g. the limited partnership must be consolidated as a subsidiary in the consolidated group accounts).

What is generally accepted accounting practice?

Generally accepted accounting practice (GAAP) means the same as it does for corporation tax purposes. It is normal accounting practice in the UK, as applied to consolidated financial statements prepared under the Companies Act 2006 (“consolidated group accounts”). In particular, this means that the accounts should comply with UK Financial Reporting Standards 2 (Subsidiary undertakings), 5 (Reporting the substance of transactions) and 9 (Associates and joint ventures).

From 1 January 2005, GAAP also include consolidated accounts prepared to International Accounting Standards (IAS) and International Financial Reporting Standards. The most relevant at the time of writing were IAS 27 (Consolidated and Separate Financial Statements), 28 (Investment in Associates) and 31 (Interests in Joint Ventures).

Either UK or international standards are acceptable.

What do 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).

What happens if a specified body is not consolidated because it is immaterial?

Accounting standards do not apply to immaterial items, and it is 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.

How should you 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 you should 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.

What happens when a 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.

How will the consolidation condition apply when the person controlling the VAT group does not have to prepare consolidated accounts?

In practice, we expect 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 (e.g. 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.

How will bodies that are wholly owned (directly or indirectly) by an overseas holding company 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 are preparing 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.