VAT and groups: changes on the way

London Skyline
By Anne-Marie Roberts, Head of Taxation (Scottish Taxes and Indirect Taxes)

23 February 2016

Have your say on changes to VAT groupings.

What is happening?

Following a number of cases at the European Court of Justice (CJEU) that addressed the issue of VAT and groups, the UK Government announced in January 2016 that there will be a consultation on the VAT grouping provisions.

HMRC is currently holding a series of meetings with stakeholders to explore and develop new ideas on VAT grouping. ICAS will be taking part in these meetings during February and members are invited to email their views to

HMRC will use feedback from the meetings to develop policy options which will be included in a formal consultation document to be issued in Spring 2016. There will then be a 12 week consultation period.

Responses will be published later in 2016 and the proposals for reform of the VAT grouping provisions will be finalised in the autumn.


EU legislation allows countries to treat independent legal persons as a single taxable person provided those legal persons are closely bound to one another by financial, economic and organisational links and are established within the confines of the particular country. [Directive 2006/112/EC, Art 11].

The UK allows VAT grouping as a business facilitation measure by which two or more "bodies corporate" can be treated as a single taxable person for VAT purposes. "Bodies corporate" includes companies of all types and limited liability partnerships.

Under section 43A of the VAT Act 1994, bodies corporate can form a VAT group if:

  • Each has an establishment in the UK: A company has a fixed establishment in the UK for VAT group purposes if it has a real and permanent trading presence in the UK.
  • They are under common control: 'Control' for this purpose has a special meaning based on the definition of holding company and subsidiary in section 1159 and Schedule 6 to the Companies Act 2006.
  • They satisfy the conditions set out for specified eligible bodies (this only affects VAT groups with a turnover over £10 million per year): Since 1 August 2004, certain bodies corporate - called 'specified bodies' - have been required to satisfy two extra conditions in order to be members of a VAT group. This is to prevent partly exempt purchasers of services setting up joint ventures within their VAT group, in order to buy in services without incurring irrecoverable VAT. The details are outlined in VAT notice 700/2

A group of companies which qualifies to be a VAT group and applies to HMRC for group registration is treated (once the application is accepted) as a single taxable person for VAT purposes. The registration is made in the name of the representative member, which is responsible for completing and rendering the single return on behalf of the group. Whilst the representative member is responsible for paying the VAT or receiving any repayment due, all the companies are jointly and severally liable for any VAT debts. Supplies between group members are normally disregarded for VAT.

The CJEU cases

The Larentia + Minerva and Marenave judgment was released in July 2015. The case considered two main issues of which only VAT grouping is considered in this article. The court considered the eligibility of bodies to be included in a VAT group and found that member states could only limit VAT group membership to legal persons where the restrictions were appropriate and necessary in order to prevent abuse, avoidance or evasion.

The Skandia judgement was issued in September 2014. The case considered whether services provided to its Swedish branch by a US Company should be subject to Swedish VAT under the reverse charge arrangements. The Court found that because the branch of the US company was a member of the Swedish VAT group, it could no longer be treated as part of the same legal entity as its US office for VAT purposes and the reverse charge would apply on supplies of services by the US head office to its branch.  HMRC has commented on the Skandia case in Revenue and Customs Brief 2 (2015).

What might need to change in the UK?

The Government has identified that the judgments in these cases may require changes to UK VAT law and the VAT grouping provisions.

HMRC has indicated that these changes are likely to include:

  • Extending VAT grouping to non-corporate bodies
  • Identifying new rules to determine "close economic, financial and organisational" links for corporate and non-corporate bodies to replace the current "control" test.

One potential area of concern is that use of the "control" test in the UK is well understood by businesses and their advisers. It is also an objective test - either an entity has control over another entity or it does not. The test under the Principal VAT Directive of "close economic, financial and organisational" links is a more subjective test and is likely to be more complex to administer.

Other questions to address could include:

  • Do the changes provide an opportunity to streamline and simplify the legislation around VAT group registration?
  • How could HMRC draft anti-avoidance legislation around a subjective test?
  • Should HMRC consider a compulsory grouping of entities if the grouping conditions are met - similar to the approach in Germany?

HMRC has emphasized in Public Notices that the UK grouping provisions are a business facilitation measure. It now has the challenge to find a balance between complying with the findings of the CJEU and coming up with revised VAT group arrangements that provide businesses with certainty on their VAT position and can be effectively administered.

Could the UK leave things as they are?

The Government has indicated that it is considering changing UK VAT law in the light of these CJEU decisions, but is change inevitable? HMRC has already indicated in its comments on the Skandia case that it considers that the UK VAT group rules can be distinguished from the rules applicable in Sweden. It is possible that the UK might decide after the consultation to retain the current approach to VAT group registration – the rules are well-established and give companies certainty on their VAT position. Any challenge to this interpretation would come through infraction proceedings against the UK.

The European Commission took infraction proceedings against the UK and other countries in 2009 for allowing non-taxable companies to be members of a VAT group. The CJEU found that the EU legislation did not support the Commission's position that a member of a VAT group is required to be engaged in taxable activities. The VAT grouping provisions were examined in detail as part of these proceedings and the UK provisions were held to be in line with EU legislation on this point.

The cases are avaliable to be read online. There have since been changes to the UK legislation to introduce targeted anti-avoidance legislation to address perceived abuses of the rules.

Watch this space!

The consultation will be a major review of the VAT grouping rules in the UK. It has potentially wide implications for existing VAT groups but also for entities such as membership organisations and partnerships across the UK which are unable to benefit from the current VAT group rules. ICAS will be responding to the consultation in due course and members are invited to submit their views to


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