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VAT groups: threat to current grouping rules

04 December 2009

The European Commission (EC) argued in a communication earlier this year that current UK VAT group rules allowing non-taxable persons to be VAT group members were not in line with the correct application of the VAT Directive.

This meant they were incompatible with EU law.

In response to the EC communication, HM Revenue & Customs (HMRC) said no amendments to the rules would be made. But on 20 November 2009, the EC upped the stakes and made a formal request to the UK to amend the rules.

It remains to be seen exactly how HMRC will respond to this latest request.

If the UK rules were amended in line with the EC’s request, then non-taxable companies would not be able to be part of a VAT group. This is particularly likely to affect charities and the not-for-profit sector, as well as certain holding companies.

The change would mean any taxable supplies made between such non-grouped companies and other companies under common control would be subject to VAT. If such a group was partially or, even worse, wholly exempt, this would lead to a significant increase in irrecoverable VAT.

HMRC’s response is eagerly anticipated, and groups should start investigating now whether and to what extent they would be affected by the EC’s proposed approach and what steps, if any, they can take to mitigate such a change.

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Tom Wilde

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