What is a VAT Group?
It is a measure in which two or more entities form a VAT group and are treated as a single taxable person for VAT purposes.
Which entities can form a VAT group and what are the eligibility criteria?
The entities which can form a VAT group are:
- A corporate body, which includes both a limited liability partnership (LLP) and a limited partnership (LP)
- An individual
- A partnership
- A Scottish partnership
The eligibility criteria are:
- Each entity is established or has a fixed establishment in the UK
- For corporate bodies, they must be under common control, although not necessarily by another member of the VAT group
- For individuals and partnerships, they must control all other members of the VAT group and must also be in business.
How does a VAT group work?
The group is registered for VAT in the name of the representative member (a nominated ‘lead’ entity) and a VAT number is issued to the VAT group. If any of the entities are currently registered for VAT, they will be deregistered and declare VAT through the VAT group. The ‘representative member’ will submit one VAT return on behalf of the group and account for any VAT due or receive repayment of any VAT from HMRC. Although the representative member submits the VAT return, all the entities within the VAT group are still jointly and severally liable for any VAT debts.
As the VAT group is treated as a single taxable person, any supplies between the VAT group entities are not a supply for VAT purposes and therefore no VAT is due on these transactions.
Before you go ahead
There are a number of points to consider before forming a VAT group:
- Any approvals or agreements reached with HMRC under the old VAT registration number(s) will end. You will need HMRC approval for them to apply to the VAT group.
- You should review the mix of supplies which will take place within the VAT group. For example, if one of the entities makes exempt supplies, you may need a partial exemption calculation to cover the VAT group as a whole. These exempt supplies may affect the input tax that the whole VAT group can reclaim.
- The VAT group will need to apply for a new EORI number for any imports and exports.
- A new VAT registration number will be required for the group. Although not necessarily a major issue, any stationery, letters, and similar correspondence that carry the original VAT numbers would need to be amended to reflect the new VAT registration number.
- HMRC thresholds do not change for VAT groups. For example, the voluntary disclosure limit remains £10,000 and the payments on account threshold of £2.3m net VAT per year will apply to the group.
- If the VAT group submits VAT returns or pays HMRC the VAT late, default surcharges may be due. The surcharge amounts will be calculated on the higher turnover of the VAT group, rather than the individual VAT registrations and therefore a higher amount will be due to HMRC.
Impact on VAT Cashflow
If you run businesses with different period ends, this will change when you form a VAT group. With a VAT group there will only be one period to consider. This may affect VAT cash flows; if any businesses are currently in a typically VAT repayment position, by grouping these will be offset against others who may be regular VAT payers. It may also be the case that inter-company charges create a positive cashflow benefit with the related VAT, so the overall impact of a single return for both/all companies should be considered fully ahead of any group application. Depending on the size of the returns for each business this may still result in overall repayments for the group in each period and monthly group returns may be appropriate.