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Introduction

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VAT Grouping allows two or more eligible individuals or companies to have a single VAT Group Registration where one of those individuals or companies act as the representative member meaning that supplies and

purchases made by all members are accounted for VAT purposes as if they were made or received by the representative member. A single Group VAT return will then be required to be submitted to HMRC to make

payments and recover VAT on behalf of all members of the VAT group. This also means that all members are treated as a single taxable person by HMRC and are jointly and severally liable for payments of VAT due to HMRC from the representative member.  If the representative member cannot pay HMRC then each member will be held liable to meet the amounts owed. 

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• This means that there will be a single Group wide VAT registration number which will be shown on all invoices issued by each member of the VAT group. 

• Supplies made between members of the VAT group are outside the scope of VAT and thus can be disregarded and VAT will not feature on inter-group company invoicing. (note the are anti avoidance measures see below)

• UK Subsidiaries and Branches can be members of a VAT group. 

• Overseas branches or subsidiaries can be members of a VAT group where their UK head office subsidiary or branch has a fixed establishment in the UK and are members of a VAT Group and as such supplies between them will be outside of the scope of VAT as they are basically the same entity. (See anti avoidance measures below) 

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 Anti Avoidance Measure Sec 43(2a) VAT Act 1994

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Anti avoidance measures are in place to ensure VAT group structures do not create an uneven playing field between VAT Groups and companies that are not within a VAT Group.  Where a company outside of the UK is part of a UK VAT Group and buys in services locally which would normally be Vatable if they were purchased in the UK and supplies them to another company in the UK which is a member of the VAT Group, these supplies will not be disregarded for VAT and Reverse Charge VAT will be applicable on the supply. 

 

Note where the supply is between an overseas branch and its head office, the supply will still benefit from being outside the scope of VAT as they are in effect the same entity. Its only where this supply is then further supplied within the VAT Group that Sec 43 (2a) would apply.

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Examples:

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(a) Company B (branch) located in Singapore and part of a UK VAT Group purchases legal services locally and onward supplies these to UK subsidiary C also part of the UK VAT group, these services will fall within the scope of UK VAT and reverse charge VAT will be applicable to the supply at 20%.   

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(b) Company B (branch) located in Singapore and part of a UK VAT Group purchases IT services locally and includes these within a broader supply to company C for Management and Admin services, then the supply of the IT services will fall within the scope of VAT and reverse charge VAT at 20% will be applicable. Note here only the IT services will fall in scope of VAT and as such it means the company will be required to have granularity of the individual costs to be able to identify and segregate them to effectively apply VAT.

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Note: in both the above two examples, if the supplies were not bought in locally and supplied to the UK using the Branches own internal resources, then the supplies would be outside the sope of VAT and no VAT would be applicable. Equally if the supplies bought locally were supplies that would normally be exempt in the UK, then there would be no VAT applicable on the supply to the UK. 

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(c) Company D (branch) located in the US and in the UK VAT Group buys in IT services locally then supplies them to company D's Head-office subsidiary in the UK then these services will fall outside the scope of VAT as the supply is effectively a self supply to the same entity.   (Joe Blogs plc branch supplying to Joe Blogs PLC Subsidiary). Note if Head-office D then supplies these to another member of the VAT group company T, then the supply will automatically be captured within the anti-avoidance rules and reverse charge VAT will become applicable on the supply at 20%.

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Please also See Skandia and Danske Bank CJEU rulings re Branches of UK entities that are in VAT Groups in the EU 

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Benefits of VAT Grouping

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• Reduces administration and only a single consolidated VAT return required rather than several separate filings

• Facilitates VAT savings as VAT is not included on intercompany invoicing between members of the VAT group and thus no loss of VAT recovery where company members are partial exempt from VAT and can't recover VAT incurred in full from HMRC

• Saves having to calculate VAT and workout recoverable VAT on inter-group transactions especially where there a multiple companies providing different products and services each with different method of recovering VAT

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Who can join a VAT Group

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• Corporate Bodies where they are each Established or have a Fixed Establishment in the UK and are under common control by another company (Holding Company / Subsidiary) or individual and satisfy wider conditions (section 3 (if applicable)

• Individuals, Partnerships and Scottish Partnerships

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Two Key Conditions for VAT Group Eligibility

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To be eligible for VAT Grouping in the UK, a business  must either:

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• Be Established in the UK or

• Have a Fixed Establishment in the UK

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Establishment

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A business is established where the main functions of the business’ central administration are carried out. This will usually be the head office, headquarters or ‘seat’ from which the business is run. This is where essential day-to-day decisions concerning the general management of the business are taken. A registered office alone is not sufficient for a person to create an establishment. A company or partnership will, generally speaking, be established in only one country. An individual is established where they are resident for income tax purposes.

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Fixed Establishment  

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A company or partnership has a fixed establishment in the UK if it has a real and permanent trading presence in the UK.

 

For example, if it has either (a) permanent place of business which has sufficient permanent human and technical resources to carry on one or more of the business activities of the company as a whole and makes supplies directly from the UK establishment; (b) or branch or office in the UK, which has sufficient permanent human and technical resources to carry on one or more of the business activities of the company as a whole and makes supplies directly from the UK establishment.  A company does not have a fixed establishment in the UK by only having a simple “brass plate” presence in the UK, or a UK based agent. 

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Note the question as to whether some branches of overseas subsidairies have a fixed establishment in the UK is currently a hot topic and a number of large enterprises are currently being challenged by HMRC as to whether their UK branches actually meet the Fixed establishment requirements and as such can lead to HMRC de-grouping such entities. 

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An individual has a fixed establishment where they have sufficient permanent human and technical resources to carry on one or more of their business activities and make supplies directly from the UK establishment. Consider the example of an individual who is resident in France and runs a nursing home in the UK; the individual employs the staff directly and owns (or leases) the property. In this instance, although the individual is resident in France, they have a fixed establishment in the UK as they are making supplies to the residents of the nursing home using the human and technical resources they control in the UK. See VAT cases in relation to Fixed Establishment 

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Two different models of establishment provisions for the purposes of VAT grouping are described below: the ‘whole establishment’ provisions and the ‘establishment only’ provisions.

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Whole Establishment Provisions - Adopted and used in the UK

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Under ‘whole establishment’ provisions, 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. 

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Provided all relevant conditions for VAT grouping are met, the entire eligible person, including all branches or fixed establishments and their head office, will be considered to be part of a single eligible person, irrespective of whether the head office or some of those branches are located in the UK. However, at least one branch or the head office must be located in the UK for the person to be eligible for VAT grouping.

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Benefits of the Whole Establishment Provisions

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The existing ‘whole establishment’ provisions are thought to encourage businesses that are established overseas to set up UK trading branches, and give them comprehensive access to the UK market, with administrative and, frequently, VAT savings. Some companies might consider this one of the many strengths that make the UK an attractive place to do business.

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The whole establishment’ provisions may also encourage companies to organise their internal structures to benefit from the place of supply rules in different countries. It is possible for supplies of legal, IT or administrative services supplied to a fixed establishment in another country to be channelled to the same entity’s UK fixed establishment. That supply could then be utilised in the UK without incurring VAT as the place of supply to the foreign establishment was outside of the UK. 

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Whilst services purchased overseas are brought into the scope of VAT where they are used in supplies made to other VAT group companies (under sec 43(2a) VAT Act), supplies of staff are not and consequently, some groups benefit significantly from services provided by staff in overseas locations to the detriment of UK head quartered competitors.

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Establishment Only Provisions

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A common arrangement for VAT grouping in other countries are the ‘establishment only’ provisions. These are distinct from the ‘whole establishment’ provisions. The UK does not currently use  ‘establishment only’ provisions.

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Under ‘establishment only’ provisions, where an entity has fixed establishments in multiple jurisdictions, it is only the establishment in the country in which the VAT group is based that can be part of that VAT group.

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For example, if the UK implemented ‘establishment only’ provisions, only UK fixed establishments of foreign companies could be within a UK VAT group: the overseas headquarters of that foreign company would be ineligible to be in the UK VAT group (contrary to ‘whole establishment’ provisions), and supplies (whether deemed or actual) from headquarters to branch or branch to headquarters would be subject to VAT.

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Most European countries (other than Ireland and the Netherlands) have adopted ‘establishment only’ provisions.

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Adopting “establishment only” provisions could increase the costs for some VAT groups, including for foreign companies whose UK branches and companies receive considerable supplies from abroad, but could also remove a competitive barrier to VAT groups based entirely in the UK.  

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Likewise, adopting ‘establishment only’ provisions may reduce the administrative burden where supplies purchased abroad are used to make supplies to other VAT group members, as they will only have to account for a ‘reverse charge’ for VAT, rather than a more complicated calculation (under Sec 43(2a) in line with current VAT anti-avoidance legislation.

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Skandia Judgement - Effect of Establishment Only Provisions

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Skandia America Corporation had a head office in the United States and a fixed establishment in Sweden (its branch), and believed that supplies made to its Swedish branch were intra-company transactions and consequently not subject to VAT. The Swedish tax authority disagreed, and following referral to the CJEU a judgement was passed that under the Swedish grouping provisions only the establishment physically located within Sweden could belong to a Swedish VAT group. Therefore Skandia America Corporation would be liable to pay VAT on its supplies to its Swedish branch, and the Swedish VAT group would have to account on VAT for those services under the section 43(2A) charge.

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The UK’s VAT grouping provisions in contrast bring the whole person into the VAT group, and consequently supplies between an overseas establishment and a UK establishment of the body are not normally supplies for UK VAT purposes, as they’re transactions within the same taxable person.

This has not changed following the decision as the court did not consider the UK’s rule, however in some circumstances the UK VAT treatment will change.

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As previously noted, the UK uses the ‘whole establishment’ provisions rule.  However, EU case law means there are exceptions to the UK’s use of whole establishment provisions that apply in certain circumstances.  

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From 1 January 2016, HMRC implemented changes to VAT grouping rules following the outcome of the case. Those rules at present are that if a UK established company, regardless of whether or not it is a member of a UK VAT group, is a member of a VAT group in an EU member state that operates establishment only VAT grouping, then supplies by that company from the overseas establishment are treated as made by the overseas VAT group (i.e. a separate taxable person). The same rules would apply to supplies made by the UK established company to the overseas establishment. This paragraph was amended for clarity on 23 September 2020.

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Services provided by the UK establishment to the overseas VAT-grouped establishment located in an EU member state with ‘establishment only’ VAT grouping provisions will normally be treated as supplies made outside the UK under place of supply rules. Input tax may be recoverable on such a supply if it is specified 9 under the UK’s Specified Supplies Order or would have been taxable if made in the UK. 

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The implication of the Skandia judgment is that an overseas establishment or fixed establishment of an entity that also has a UK-establishment or fixed establishment is part of a separate taxable person if the overseas establishment is VAT-grouped in a member state that operates similar ‘establishment only’ grouping provisions to Sweden.

 

Furthermore, the effect of their VAT grouping rules is that the part of the entity physically located in that country becomes part of the VAT group there, and is no longer part of the single taxable person of the entity’s head office and branches.

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This will be the case whether or not the entity in the UK is part of a UK VAT group. Businesses must treat intra-entity services provided to or by such establishments as supplies made to or by another taxable person and account for VAT accordingly:

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• Services provided by the overseas VAT-grouped establishment to the UK establishment will normally be treated as supplies made in the UK under place of supply rules, and subject to the section 43(2A) charge if taxable

• Services provided by the UK establishment to the overseas VAT-grouped establishment will normally be treated as supplies made outside the UK under place of supply rules — therefore they will need to be taken into account in ascertaining input tax credit for the UK establishment —

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If the UK entity is in a UK VAT group, the same applies to supplies between the overseas establishment and other UK VAT group members in UK. Under these circumstances the legislation in VATA section 43(2A)-(2E) does not also apply, as the overseas establishment is not seen as part of the UK VAT group.

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It’s the responsibility of individual businesses to adhere to local VAT grouping rules where they operate outside of the UK and to assess how it applies to their own particular circumstances.

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See below link to apply for Group Registration

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Apply for VAT group registration or amend your details

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VAT Groups and TOGC

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The formation of a VAT group creates a single person for VAT purposes and as such any supply by a member of a VAT group is considered to be made by the representative member of the group. Generally, supplies between members of a group are disregarded for the purposes of VAT. But this does not mean that the members of a group are not businesses when they make supplies to each other.

If a business, or part of a business capable of separate operation, is transferred between group members then this can be treated as on-going activity provided that it is used to make supplies outside the group.

 

Transfers outside of the VAT Group

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The transfer of a business, or part of a business capable of separate operation, from within a VAT group to a business outside of that group is subject to normal TOGC rules.

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Transfers withing a VAT Group

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The initial transfer of a business, or part of a business capable of separate operation, to a company in a VAT group is a TOGC if that company both:

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• Intends to continue to use the transferred assets to operate the same kind of business

• Will provide supplies of that business to other group members, and those other group members use or intend to use them to make supplies outside the group

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This is also the case if, after the initial transfer into the group, the business is transferred between group members, provided that ultimately the services that it provides are made to a group member that makes or intends to make services outside the group.

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If the buyer uses the assets to make supplies directly outside the VAT group, this would also be a TOGC.

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Note:  Assets transferred into a VAT group must be used to make supplies outside the group and not merely consumed within the VAT group.

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TOGC and Partially Exempt VAT Groups

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A member of a partly exempt VAT group who acquires business assets as part of a TOGC, must treat these assets as being both supplied to the group and supplied by the group. This means a self-supply is triggered.

In practice, the representative member must account for output tax in relation to the supply by the group and recover the input tax incurred in relation to the supply to the group, in accordance with the partial exemption method in operation. But the input tax cannot be attributed to the self-supply itself.

 

The self-supply will not be triggered in relation to:

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• Any assets which were assets of the previous owner more than 3 years before the date of the transfer

• Goodwill (for example, goodwill, use of a trademark or trading name, the sole right to trade in a particular area, and so on

• Any assets which are zero-rated or exempt (for example zero-rated or exempt freehold or leasehold interests in land)

• Items which fall within the Capital Goods Scheme, for further details of items covered by the scheme see

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Divisional Registration

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Only bodies corporate can register in divisions under section 46(1) of the VAT Act 1994.

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We consider a corporate body is trading in divisions if:

• it has 2 or more branches, sites or departments which are self-accounting units in the UK

• the branches, sites or departments carry out different functions or trade in different geographical areas, and have their own independent accounting system

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With Divisional Registration, each of the divisions of a single corporate body is separately VAT registered and given their own VAT registration numbers and allowed to submit their own VAT Returns.

There is no automatic right to Divisional Registration. Your application will be approved by HMRC only when they are satisfied that there would be real difficulties in submitting a single VAT Return for the corporate body as a whole within 30 days of the end of your tax period.

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Requirements for Divisional Registration

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You may be approved as a divisional registration only if:

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• all divisions are registered, even those whose turnover does not exceed the VAT registration threshold

• all the divisions must be independent units with their own accounting systems and must: - operate from different geographical locations, be supplying different commodities, be carrying out different functions, for example manufacture, export or retail

• the whole corporate body must be, or be treated as being, fully taxable (the corporate body can be treated as fully taxable if the exempt input tax it incurs is below the de minimis limits set out in Partial exemption (VAT Notice 706), the de minimis limits apply to the corporate body as a whole, not to each division)

• all divisions must send in VAT Returns for the same tax periods, we will normally advise you what these periods are, but you can apply for non standard periods if you wish

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 See below link for more details:

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Group and divisional registration (VAT Notice 700/2) - GOV.UK

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-Contains public sector information licensed under the Open Government Licence v3.0.

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