VAT Groups: Eligibility and Liability

Grouping removes VAT on supplies between members, which is why groups exist. It also makes every member liable for the whole of the group’s VAT debt, including debts arising from a member it has no control over.

What a VAT Group Is

Two or more bodies may register as a single VAT group. The group has one VAT number, files one return, and, the point that matters most, supplies between members are disregarded for VAT purposes.

That disregard is the reason groups exist. Where one member makes exempt supplies and cannot recover VAT, a charge from another member would be an absolute cost. Grouping removes it.

Eligibility and Control

Eligibility turns on control. Bodies corporate may be grouped where one controls the others, or where one person controls them all, and each has an establishment in the United Kingdom. The rules extend in defined circumstances to certain non-corporate entities, including individuals and partnerships controlling a body corporate.

The recurring eligibility issues are:

• The establishment condition and how it applies to overseas members and their UK branches.
• Control where holdings are split, or where control is exercised in substance rather than by shareholding.
• Anti-avoidance powers allowing HMRC to refuse or terminate grouping for the protection of the revenue, and to exclude a body where grouping would produce a tax advantage.
• Specified bodies provisions restricting grouping in certain arrangements.

The Effects

• A representative member accounts for all the group’s VAT and is treated as making and receiving all supplies to and from third parties.
• Intra-group supplies are disregarded: no output tax, no input tax, no invoices required for VAT purposes.
• Partial exemption is calculated for the group as a whole, which is frequently the real reason for grouping and also the source of most disputes. See our guide to partial exemption.
• Registration and deregistration thresholds apply to the group.
• Capital goods scheme items follow the group, and movements in and out of the group affect them.

Where the Disputes Arise

Joining and leaving

An application to join or leave takes effect from a date determined under the rules, and HMRC has a period in which to respond. Businesses frequently act on the assumption that a change is effective before it is, and account for VAT on the wrong footing in the interim. Get the effective date confirmed before changing the accounting.

Historic liability

A company leaving a group does not shed its liability for VAT debts arising while it was a member. On a corporate sale, a buyer acquiring a company out of a VAT group inherits that exposure, and it should be dealt with in the warranties and indemnities rather than assumed away.

Overseas branches and the disregard

Whether supplies between a UK member and an overseas establishment are disregarded has been heavily litigated and depends on whether the overseas establishment is itself in a foreign VAT grouping. Groups with overseas operations should not assume the disregard applies.

Anti-avoidance and grouping refusals

HMRC may refuse an application, or terminate a grouping, for the protection of the revenue. Such a decision is appealable, and the tribunal’s jurisdiction is supervisory in character. It examines whether the decision was reasonably reached rather than substituting its own view. The arguments that succeed are about the decision-making: relevant matters ignored, irrelevant matters taken into account, or a conclusion no reasonable officer could reach.

Practitioner Application

• Advise on joint and several liability before joining, in writing. It is the single most consequential feature and the one clients are least aware of.
• Confirm the effective date before changing how VAT is accounted for.
• On a corporate transaction, check the VAT group history of the target and deal with historic liability in the sale documents.
• Review the partial exemption method whenever membership changes. A method that was fair and reasonable for the old group may be distortive for the new one.
• Track capital goods scheme items across group changes. This is where the largest unrecorded liabilities sit.
• Do not assume the intra-group disregard applies to overseas establishments.
• Where HMRC refuses or terminates grouping, the appeal is about the reasonableness of the decision, so the case is built on what HMRC did and did not consider.

Frequently Asked Questions