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HMRC internal manual

VAT Groups

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VAT groups - protection of the Revenue: the use of the revenue protection powers

The definition of the words “for the protection of the revenue” as used in sections 43B(5) and 43C(1) and (2) were the subject of a hearing before the VAT & Duties Tribunal in March 1998. This was the case of the National Westminster Bank Plc and The Commissioners of Customs & Excise (LON/97/124).

The decision confirmed that the Commissioners can exercise their powers to protect the revenue in any circumstances where they are satisfied that there is a significant revenue loss, regardless of whether it was demonstrably the intention of the companies involved to reduce their tax liability by use of the grouping facility provided we have carried out the evaluation required.

However, it is important not to use the revenue protection powers when the revenue loss follows from the normal operation of grouping. By this, we mean that the “revenue loss” which occurs because VAT is eliminated on the value added by a group member, when a supply takes place between two group members.

This case confirmed that

“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.”

On the question of dealing with the application, the chairman stated that:

“ … the proper course for the Commissioners to have followed would have been to write to the Appellant stating that they were considering whether to refuse the application and to invite further information [on the reasons given for the application], together with any other matters which the Appellant wished to be considered.”

The tribunal concluded that the Commissioners had not been reasonable in the exercise of their power to refuse applications for grouping for the protection of the revenue and allowed the appellant’s appeal.