The United Kingdom Government is currently consulting taxpayers on proposed changes to value-added tax rules that could have an impact on companies operating a VAT group structure.
VAT grouping provisions are included in both European Union and UK legislation.
Article 11 of the EU VAT Directive allows member states to treat two or more businesses established in the territory of that member state as a single taxable person (a VAT group) if the businesses have close economic, financial, and organizational links.
Current VAT Grouping Legislation
UK VAT grouping legislation allows two or more companies or limited liability partnerships, known as bodies corporate, to register as a VAT group if each body is established in the United Kingdom, and they are under common control — for example, a parent company and its subsidiaries.
Reasons For Change
The Government has proposed changes to the UK VAT grouping rules in response to rulings by the European Court of Justice in the joined cases Larentia + Minerva and Marenave.
In the Larentia + Minerva and Marenave case, concluded in July 2015 in response to a German court, the European Court of Justice was asked, first, whether EU VAT grouping rules preclude national legislation under which only a legal person, but not a partnership, can be integrated into the undertaking of another taxable person, and, second, must there be a relationship of control and subordination between a VAT group member and the representative member.
The Court ruled that nothing in EU legislation on VAT groups restricts membership to bodies corporate (contrary to current UK practice). It said that representative members need not have a subordinating and controlling relationship with the other group member (also contrary to current UK practice). However, these provisions do not have direct effect, it stated, meaning that taxpayers cannot rely on the EU VAT legislation irrespective of domestic law.
Consequently, the Court ruled that member states may only restrict VAT grouping to legal persons where those restrictions are appropriate and necessary to prevent abuse, avoidance, or evasion.
As a result of that judgment, the UK Government expects to make changes to UK law and VAT grouping provisions. These amendments are likely to include:
- Extending VAT grouping to non-corporate bodies; and
- Identifying new rules to determine "close economic, financial, and organizational" links for corporate and non-corporate bodies, replacing the current "control" test based on a company law definition of a subsidiary.
Who Should Be Aware of the Proposals?
According to a brief issued by HM Revenue and Customs (HMRC), the consultation will be of interest to UK VAT-registered businesses who are members of a VAT group and other businesses who are interested in applying for VAT grouping. The contents of the brief are also relevant to accountants, consultants, and others who provide VAT advice to such businesses.
HMRC said that the consultation offers an opportunity for businesses and their representatives to comment on other grouping-related matters, particularly those where the provisions differ across EU member states, such as was discussed in a separate case concerning Skandia.
This information will help inform future discussions with the European Commission and other member states, the Department added.
In its first phase, the consultation is taking the form of a discussion of new ideas on VAT grouping between HMRC and business representative bodies. HMRC will then use the feedback to develop a series of policy options, and these will form part of a formal written consultation, which will begin in spring 2016 and last for 12 weeks.
A summary of the consultation responses will be published in summer or autumn.