One way of reducing the HMRC’s hassle of dealing with VAT on intra-company charges is to set up a VAT group registration. Business Brief 11/2016 deals with some complex issues concerning transfers of businesses as a going concern (“TOGC”). The issues discussed in the Brief concern how TOGCs by members of a VAT group should be treated, especially if any of the parties involved are partly exempt. These are particularly complex area of VAT and not one that occurs on a regular basis for SMEs. However group registrations can be very useful arrangements for corporate groups of all sizes so it’s a good time to remind ourselves of the pros and cons of VAT group registrations. 
So what is a VAT group registration?
A VAT group registration is when a number of corporate bodies are registered under a single number. The main rules are set out in VAT Notice 700/2: Group and Divisional registration: http://tinyurl.com/pcejzeo. However in principle, companies can register in a group if they are under common control and are resident in the UK. There are certain anti-avoidance rules to prevent the abuse of VAT registrations; for example for partly exempt businesses, property transactions etc.
Partnerships and other “legal entities”, such as sole proprietors, trusts can’t, at present, register in VAT groups, although HMRC has recently said it is considering the issue.
The benefits
Most large, corporate groups are registered in VAT groups. The reasons are quite compelling:
- Transactions between group members aren’t liable to VAT, which means that there’s no need to issue VAT invoices.
- This can significantly reduce the VAT bill for partly exempt businesses who receive services from other group companies.
- Sales and purchases to and from third parties are treated as made “to and by” the group representative member.
- There is a single VAT registration number for the group as a whole.
- The group only has to submit one VAT return for all companies.
As a VAT consultant, a large proportion of the queries I receive are about transactions between associated businesses. But if you’re registered in a VAT group, there’s no VAT liability on intra-group transactions, which makes life much less complicated. Plus, for many partly exempt businesses, the VAT savings on intra-group charges can be significant.
The disadvantages
But yes, there are disadvantages as well.
- The companies have to be very well organised and co-ordinated to ensure that all information is ready on time for preparing or submitting VAT returns. One late company could put the whole group into default, with very large surcharges based on the VAT due from the whole group.
- Larger businesses may have to make monthly payments on account and are subject to more anti-avoidance provisions and potential penalties.
- The group may have to use a partial exemption special method to calculate how much VAT it can claim from HMRC.
- The group as a whole has only one partial exemption “de minimis” limit, rather than one for each separate company.
- Certain anti-avoidance provisions are specifically written for VAT groups “for the protection of the revenue”.
- There are also special rules to prevent VAT avoidance in the case of certain cross border business and certain other classes of transactions.
The principles of group registration are quite logical, but things can become very complicated if any of the businesses is partly exempt, if you have overseas companies or branches, especially if you’re involved with property transactions.
Group registration can be a very efficient way of managing the VAT affairs of a corporate group, as well as providing a “VAT free” inter-company trading situation. However the business affairs of every corporate group are unique so you’d want to carefully consider whether to set up a group registration. For most corporate groups, the pros almost always outweigh the cons.
Transactions between associated businesses
I mentioned above that group registrations are only allowed for companies, not individuals or partnerships. Which actually seems a bit unfair, because it means that smaller associated businesses – which often don’t include companies – miss out on the benefits of group registrations. This is frustrating because many of the VAT technical issues on transactions between associated businesses are just as difficult for smaller business, who have much fewer resources to deal with them.
The main effect of this is that SME business owners often have to cope with technical issues relating to property, cost sharing, partial exemption and similar issues because they can’t use the group registration arrangements. Some of these issues are very complicated and can be very messy to manage. I’ve discussed many of these issues – for both SMEs and larger corporate groups – in my book VATWoman’s Guide to VAT on intra-company transactions and management charges which you can buy as a pdf from our shop or in paperback from Amazon.
For the most part, group registrations are a very efficient way of managing VAT affairs for corporate groups. Let’s hope that similar provisions for non-corporate businesses are made available sooner rather than later.
Marie
August, 2016