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HMRC internal manual

VAT Groups

HM Revenue & Customs
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VAT avoidance - groups of companies statement of practice on the new Schedule 9A VATA 1994: example of arrangement where Customs would use their powers under Schedule 9A


A partly exempt group of companies (the PX group) wishes to buy a large number of new personal computers for £1 million plus any VAT.

Commercial considerations

In structuring this purchase the PX group considers four main factors:

  • How to finance the purchase. The group wishes to fund about half of the purchase price from its own resources, paying the balance over a four year period.
  • The accounting treatment of the purchase. The group does not wish to increase the gearing in its group balance sheet.
  • The direct tax treatment of the purchase. The group is not expecting to make a profit this year for corporation tax purposes, although it expects to return to profitability in the relatively near future.
  • The VAT cost of the purchase. The group wishes to minimise the incidence of irrecoverable VAT suffered.

Structure chosen

The above factors having been considered, the following steps take place:

  • The PX group sets up a new company (Newco) and registers it as part of its VAT group
  • Having taken advice on their precise terms, the PX group executes:

    • (a) a leasing agreement between Newco and the other PX group companies, this agreement requiring an immediate 50% deposit in respect of each computer to be leased (total £500,000); and
    • (b) an agreement to sell Newco to an unrelated Finance House (F Ltd) for a nominal sum
  • The deposit is paid and Newco is sold to F Ltd
  • Newco leaves the PX VAT group
  • Newco buys the computers for £1 million plus VAT, recovering the VAT in full
  • Newco begins to make leasing charges to the PX group. These will eventually amount to £800,000 plus VAT over the four year period.

Summary of effects of structure

The PX group has taken legal advice to the effect that:

  • its arrangements do not involve it in significantly greater commercial risk than a straightforward leasing agreement
  • because of the precise terms of the agreement, the computers will not be included in the group balance sheet
  • the precise terms of the agreement will allow Newco to claim capital allowances on the purchase of the computers at a time when the consequent direct tax losses can be surrendered to other members of the F Ltd loss relief group, this benefit having been factored into the leasing charge
  • the arrangements have the effect of spreading the irrecoverable VAT suffered on the purchase over a four year period, and
  • reducing the absolute amount of irrecoverable VAT by 20%
  • however, the PX group is advised that these VAT efficiencies will be reversed if Customs and Excise issue a direction and assessment under Schedule 9A of the VAT Act 1994

Customs and Excise view of structure

Customs and Excise would consider that an arrangement such as that described above has a number of main purposes. Customs would further consider that one of these main purposes (namely the desire to generate a VAT saving by having Newco obtain full input tax recovery against outputs some of which are disregarded under s43(1)(a)) is not a genuine commercial purpose within the meaning of Schedule 9A para 2. Following the procedure outlined in part 5 of this statement of practice, therefore, Customs would issue a direction in these circumstances (most probably to the effect that the 50% deposit should not have been disregarded under s43(1)(a)). An assessment would follow the direction.