The basic rule for VAT grouping is that two or more corporate entities under common control can form a single VAT registration, known as a VAT group. One of the main advantages of forming a VAT group is that all supplies between members of the VAT group are disregarded for VAT purposes, so there is no VAT on intercompany charges.
No taxable supplies outside the group
The fact that no taxable supplies are made outside the VAT group does not prevent a group being formed, provided one of the members is making taxable supplies which would make it liable or eligible to register for VAT in its own right. However, as taxable supplies between group members are ignored, a group will not be able to recover any input tax unless it makes either:
- UK taxable supplies outside the VAT group;
- supplies outside the UK that would be taxable if made within the UK; or
- exempt financial/insurance supplies to customers outside the EU.
How could this help?
In the event that the VAT group did not make any taxable supplies outside the group and therefore could not recover any input tax, and in fact would only be submitting nil returns, what advantage could the businesses obtain by VAT grouping?
Example: VAT group or no group?
A group of three companies is set up providing insurance and insurance broking services. One provides insurance to UK clients; one acts as a broker for UK insurance business; and the third provides insurance to customers outside the EU.
They are managed by a fourth company, which acts as the holding company and provides central purchasing and management services to the three trading companies. It charges the group companies a total of £300,000 a year in management charges and recharges of computer software licences, stationery etc., of £250,000 a year.
The holding company has a total taxable turnover of £550,000 per annum, which means that it has to register for VAT and charge VAT on the supplies to its subsidiaries, which as they only make exempt supplies means that two of the companies cannot recover any the VAT on their purchases. The third company, providing insurance to customers outside the EU can register for VAT and recover the VAT on its costs, which are £100,000 per annum (£50,000 management charges and £50,000 other goods and services) plus VAT of £20,000. The holding company can recover the VAT on its purchases but has to recharge these costs, plus a small mark-up to the subsidiaries.
This leaves irrecoverable VAT of £100,000 (£500,000 x 20%) for the four companies. If they were to form a VAT group there would be no VAT on the management charges, and the VAT on the purchases by the insurance company dealing with customers outside the EU would still be recoverable. The VAT on the goods and licences etc., purchased from outside the group would remain irrecoverable. The VAT savings by forming a VAT group would be £60,000 (£300,000 x 20%).
Tip:
After forming a VAT group in the above circumstances all the supplies made by the group are exempt from VAT, but overall the VAT group is able to recover £10,000 in VAT relating to supplies of insurance to customers outside the EU and save VAT on intercompany charges of £60,000.
This structure is not only useful for insurance companies, but also care homes, financial services businesses, educational businesses and charities.
Practical Tip :
If you have a number of companies that trade with each other and it results in irrecoverable VAT you can still form a VAT group and avoid these costs, even if they make no other taxable supplies outside the group.
Andrew Needham examines an interesting potential opportunity in the VAT grouping rules.
