All change for UK VAT Groups?
By Susan Cattell, Head of Tax Technical Policy
16 October 2020
Susan Cattell outlines HM Treasury’s call for evidence on potential changes to the UK VAT Grouping rules – one proposal under consideration would involve compulsory VAT grouping.
HM Treasury has issued a call for evidence on VAT Grouping - Establishment, Eligibility and Registration. The intention is to gather information and views on the current UK rules and views on the approach adopted by other jurisdictions. Responses will inform future policy direction. The introduction notes that the purpose of VAT grouping is to allow administrative efficiency for companies under the same ultimate ownership: VAT savings are not the purpose of VAT grouping but are sometimes a consequence of it.
Some of the potential changes discussed would be significant, so this is an opportunity to ensure that the Treasury has all the relevant evidence.
VAT grouping and establishment provisions
The UK adopts a ‘whole establishment’ approach to VAT grouping. This means that all ‘fixed establishments’ (or ‘branches’) of the eligible person, whether in the UK or abroad, are considered to be part of a single eligible person. By contrast it is common for other jurisdictions to use an ‘establishment only’ approach – where an entity has fixed establishments in multiple jurisdictions, it is only establishments in the country in which the VAT group is based that can be part of that VAT group.
If the UK switched to ‘establishment only’ rules, only UK fixed establishments of foreign companies could be within a UK VAT group; the overseas headquarters of a foreign company would be ineligible to be in the UK VAT group and supplies from headquarters to branch or branch to headquarters would be subject to VAT.
The Treasury would like evidence about the advantages of the current ‘whole establishment’ approach and the potential impacts (positive and negative) of switching to an ‘establishment only’ regime.
Whilst the UK operates a ‘whole establishment’ approach, there are exceptions in certain circumstances - introduced following the CJEU judgment in the Skandia case and effective from 1 January 2016. The call for evidence notes that the new Skandia rules imposed an administrative burden on some businesses and asks whether they should be retained or reversed – and about the impact of any further changes in this area.
Compulsory VAT grouping
In some other jurisdictions VAT grouping is compulsory for specific sectors. This can offer administrative easements and level the playing field for businesses, which would then be subject to the same VAT treatment. There are also some jurisdictions where VAT grouping is optional but if it is adopted for one entity, all related entities which meet the relevant conditions must also be part of the same VAT group – an ‘all in or all out’ model.
The Treasury would like evidence on the benefits and disadvantages which could arise from introducing a compulsory VAT grouping system in the UK and whether these would vary for different sectors. It also requests examples of businesses which are not VAT grouped for commercial or regulatory reasons.
Eligibility criteria: partnerships
Legislative changes in 2019 mean that Scottish partnerships and general partnerships can join VAT groups, where they control all other members of the group.
Evidence is requested on various issues relating to the use of partnerships in VAT groups and on whether the current approach should be changed.