VGROUPS08550 - VAT avoidance - groups of companies statement of practice on the new Schedule 9A VATA 1994: calculation of charge to VAT

Disregarded supplies

Where a direction is made to treat a supply as not being disregarded between group members then tax will become payable according to its value (adjusted as appropriate to take account of any direction issued under the VAT Act 1994, Schedule 6, paragraph 1 if the supply is less than market value). A credit will be allowed for that part of the tax which would have been deductible according to the partial exemption method of the VAT group registration.

De-grouping

Where the direction de-groups an entity from a group registration then (to the extent that the direction has force for tax periods after it is issued see VGROUPS08500) all supplies made by that entity to all other members of the group, and all supplies made by other members of the group to that entity will, from the date specified in the direction, be treated as taxable supplies. Action in relation to assumptions for events prior to issue of the direction will be covered by the new powers of assessment and only those transactions relevant to the tax advantage will be affected (see VGROUPS08450 ‘Powers of direction’ heading).

Mandatory grouping

Normally, the purpose of a direction to group entities together will be for HM Revenue and Customs to recoup any excess claim to input tax. In such cases, the amount of tax to be charged will be the amount of input tax recovered less the amount which would otherwise have been recoverable in accordance with the partial exemption method of the appropriate VAT group registration. A credit will also be allowed in connection with any output tax charged between the parties, which would not have been due according to the assumptions specified in the direction.

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Transitional provisions

The new provisions overlap with existing VAT group anti-avoidance provisions contained in the VAT Act 1994, section 43(1A) in that they are available for use in cases where the relevant event occurs on or after 29 November 1995. But section 43(1A) remains in force for cases prior to its repeal on 29 April 1996 (Royal Assent for the Finance Bill 1996). Customs will not use the powers under Schedule 9A if an assessment under section 43(1A) could be raised to correct the mischief from an avoidance scheme.

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Interaction with Capital Goods Scheme (CGS)

It is possible that assets to which the CGS applies will become the subject of a direction. Indeed, the transfer of such goods to or from a VAT group registration could qualify as a relevant event meeting the necessary conditions for triggering the new provisions. In deciding whether there is a tax advantage, justifying issue of a direction, HM Revenue and Customs will take into account the impact of the CGS.

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Interaction with the VATA 1994, section 44

The fact that the transfer of a business results in a charge to tax under the provisions of the VAT Act 1994, section 44 (these are to remain in force) will not preclude HM Revenue and Customs from exercising the new powers. However, in such cases where a direction is considered necessary, credit will be allowed in calculating an assessment for unpaid tax against a charge under section 44 which would not have been due according to the assumptions specified in the direction.