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HMRC internal manual

VAT Groups

VAT avoidance - groups of companies statement of practice on the new Schedule 9A VATA 1994: conditions for the issue of a direction under the new Schedule 9A: tax advantage

A tax advantage is defined (Schedule 9A, paragraph 1(4)) as arising in circumstances where an input tax credit or payment under the VAT Act 1994, section 39 is taken on goods and services used to make the undercharged supply. It is not essential that the right to a tax credit or payment should be that of the supplier of the undercharged supply. The legislation specifically provides that the condition is also fulfilled where the supplier acquires the goods and/or services tax free under the provisions relating to the transfer of a business as a going concern, and the transferor or some previous owner of the business had been entitled to an input tax credit (Schedule 9A, paragraph 1(6)).

The following example based on an entry scheme illustrates why this is necessary.

A partly exempt group of companies (the PX group) wishes to reduce the VAT on computer equipment. It therefore arranges for the equipment to be provided by an associated company, Newco 1, which operates a leasing business.

Newco 1 purchases the necessary equipment and deducts input tax under its own VAT registration against its intended supplies of leasing services to the PX group.

Before entering into a lease agreement Newco 1 transfers its business, including the assets for use by PX group, as a going concern to another associated company, Newco. 2. The transfer is not subject to VAT.

Newco 2 enters into a leasing agreement with PX group and after an appropriate period joins the group to ensure that the major part of the lease rentals fall to be disregarded. Overall, the arrangements deliver the tax advantage which Schedule 9A is intended to counter even though Newco 2 has not itself had any entitlement to an input tax credit.

In providing that in such cases the transferor and the transferee shall be treated as the same person the legislation ensures that such arrangements are not excluded from the scope of these anti-avoidance measures.