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HMRC internal manual

VAT Groups

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HM Revenue & Customs
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VAT avoidance - groups of companies statement of practice on the new Schedule 9A VATA 1994: why is this legislation required?

The new provisions are designed for use only against certain categories of avoidance scheme which rely on the existence of the group registration provision contained in the VAT Act 1994, section 43. VAT Act 1994, section 43(1)(a) provides that any supply of goods or services between members of the same VAT group shall be disregarded, but the schemes in question seek to exploit the “disregard” provision for the sole purpose of reducing the VAT on supplies of goods and services purchased by the group from external sources.

In addition to providing an administrative convenience to the taxpayer, a tax benefit inevitably results through the normal operation of the disregard provision, which prevents supplies between members of the group registration from being taxed or treated as exempt supplies. The tax benefit which results naturally from group registration is not necessarily VAT avoidance and Customs accept some loss of tax from the facilitation measure. The following is an example of VAT group arrangements that fall outside the scope of these anti-avoidance provisions.

Example of acceptable VAT savings from operation of grouping rules

A company carries on a variety of activities in separate divisions. These divisions “supply” goods and services to each other but, as they are all part of the one body corporate, no supply is made for VAT purposes and no output tax occurs. Input tax recovery is determined according to the taxable status of the company as a whole.

If the same business were to be carried on by a number of separately registered companies, all members of the same group of companies, then these supplies would be supplies for VAT purposes. Should any member of the group be VAT exempt, or otherwise be unable to recover its VAT in full, a VAT cost will have arisen which would not have arisen had the business been run in a single company but in separate divisions. If all the companies are put into a single VAT group registration then the VAT position of the group is the same as a single company with divisions.

No charge to output tax would arise on supplies between members of the group, but equally, no input tax could be claimed in connection with those internal supplies: recovery of such tax would be subject to the tax status and activities of the group as a whole.

Customs will, however, seek to use the new provisions where avoidance of VAT over and above such savings arise out of the facilitation measures.

Examples of instances where they would seek to take action

Entry schemes

A typical entry scheme would involve the supplier acquiring goods and services, and recovering the associated VAT before moving the assets into the user’s business (either by transferring the assets to another company in the user’s VAT group or by joining the group itself). A common feature of such schemes is that periodic payments due from the user under the contract are staged so as to ensure that the greater part falls due when supplier and user are within the same VAT group.

Exit schemes

Under a typical exit scheme, a company wishing to use goods and services subject to VAT which it cannot recover (the “user”) acts in concert with a central purchasing company (the “supplier”) within its existing VAT group.

The user enters into a contract with the supplier and makes a substantial pre-payment. The supplier then leaves the group, purchases the relevant goods or services and supplies them to the user. The supplier takes full recovery of VAT on the goods and services, but accounts for VAT only on the balance of the purchase price. The user is therefore able to reduce the amount of irrecoverable VAT it would otherwise have suffered on goods and services purchased for its business.

These examples are illustrative only and Customs will seek to apply the provisions to any similar scheme or its variation. Features common to such avoidance schemes are that input tax deduction is taken against standard-rated supplies, but output tax does not fall on the full value of those supplies because they are treated to some extent as being made between members of the same VAT group and so are disregarded for VAT. The simplest means of bringing the disregard into play is by moving a company in to or out of a VAT group at a critical moment. But a similar result could be secured by entering into some other transaction, such as the transfer of assets or the assignment of an agreement to or from a group member (see also VGROUPS08250 covering the definition of transaction in the context of a relevant event).