Insights

As of 1 November 2019, unincorporated entities – partnerships and sole traders - are legally entitled to join VAT Groups, provided that they control the other corporate bodies in the Group. Previously only limited companies and LLPs were permitted to operate in this way.

Does my business qualify to be in a VAT Group?

This new rule was confirmed in the Finance Act 2019 and applies provided that the non-corporate bodies in question can fulfil three conditions:

• The business must be entitled to register for VAT as a stand-alone entity, involved in making taxable supplies;
• The business must have a fixed establishment in the UK;
• The business must have control of all the other corporate bodies, similar to a traditional parent/subsidiary relationship for corporate bodies.

It is possible for an overseas business with trading interests in the UK to be part of VAT Groups, provided that it has a recognised operation in the UK which meets the standard criteria of the place of supply rules.

If the individual businesses were previously VAT registered beforehand, their original VAT numbers would be cancelled, and a new group number issued.

What are the benefits of VAT Groups?

Group members can benefit in a number of ways. These include:

• Only having to file one VAT return per group;
• The group can choose which UK bodies to include;
• The group can include an exempt company (outside of the group an exempt company would not be able to register for VAT and therefore cannot usually reclaim input tax);
• Supplies between group members are disregarded.

There are also some downsides to VAT Groups, the main ones being:

• The same time limits apply for VAT returns and it may be more difficult to collect all information needed to prepare the VAT return in time;
• If an exempt company is included, the whole group becomes ‘partially exempt’, which means that input tax will be partially restricted;
• If one company is unable to pay their share of the VAT liability for any period, the rest of the group is jointly liable for this debt;
• If the whole group’s VAT liability exceeds £2.3 million, they will be required to pay VAT on account on a monthly basis – adding to the administrative burden;
• Late filing of group VAT returns will lead to higher penalty payments or surcharges.

Ultimately, when it comes to VAT Groups, it is important to understand that reaping any of the benefits of being part of a group depend on having effective cashflow and administrative processes, to ensure returns are always filed on time.

Example showing how the new rules apply

John and Jeff trade as a partnership, “JJ Services”, offering consultancy services in the recruitment industry. They also each own 30% of the shares in an online recruitment agency, “JJ Jobs Limited”.

The JJ Services partnership and JJ Jobs Limited cannot form a VAT Group as it stands, because John and Jeff own the shares of JJ Jobs Limited as individuals. However, if the same 60% of the shares were held by the partnership as an investment, the two entities would qualify for a group VAT registration.

For more information on forming a VAT Group please contact partners@rjp.co.uk