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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 not use their powers under Schedule 9A



A partly exempt group of companies (the PX group) wishes to sell one of its head office buildings, which is surplus to requirements following a downsizing exercise. All of the PX group companies are included in a single VAT group.

The property is owned by P Ltd, the group property company, and used by M Ltd, the group management services company. M Ltd pays (and has historically paid) annual rentals in advance on 1 January under a formal 15 year lease. The PX group has elected to waive exemption in respect of all of its properties, although this currently has no effect in respect of the rentals paid by M Ltd, these being disregarded under s43(1)(a).

It is now May 1996, and the PX group wishes to dispose of the property on or around December 1997, when M Ltd’s lease (coincidentally) runs out. It will be difficult to relocate M Ltd’s staff before that date. However, the directors have already found a willing buyer for the property. The buyer is unrelated to the PX group.

Commercial considerations

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

  • Cash flow. The group would like to make the disposal as soon as possible, using the proceeds to pay off expensive debt
  • Accounting. The group would like the profit on disposal of the building to be included in this year’s results if possible.
  • Direct tax. The gain on disposal of the building can be sheltered if the disposal takes place this year.
  • VAT. As a matter of policy the group manages the irrecoverable VAT on all of its overheads.

Structure chosen

The directors manage to agree with the purchaser the following arrangements:

  • P Ltd will sell the freehold of the property to the purchaser on 1 July 1996
  • however, the freehold will be subject to M Ltd’s lease, which will have 18 months to run by then
  • the purchaser will opt to tax the property prior to sale so that the transaction can be treated as the transfer of a business as a going concern for VAT purposes
  • in order to avoid the situation where the purchaser charges M Ltd VAT on the final year’s rent, M Ltd pays the final year’s rent to P Ltd before the sale takes place, an adjustment being made to the sale price to reflect this.

Summary of effects of structure

The structure meets all of the group’s commercial objectives. However, the group’s advisers are concerned that the advance payment of rent by M Ltd might lead to Customs issuing a direction and assessment under Schedule 9A.

Customs and Excise approach to the arrangements

Customs and Excise would not issue a direction based on the above facts. Even though the final year’s rent is advanced in order to avoid the incidence of irrecoverable VAT, it is not considered that this would have been a main purpose of the sale of the property.