To group, or not to group – VAT is the question

The decision to set up a VAT group is not as straightforward as merely considering whether the required conditions are met.  It is also important to consider the advantages and disadvantages of VAT grouping, which could have a negative impact on the group members without careful planning.

When can a VAT group be set up and who can join the group?

The conditions to set up a VAT group and details of eligible bodies are set out in HMRC guidance, together with the application instructions here.

What are the advantages and disadvantages of VAT grouping?

Advantages of VAT grouping:

  • A VAT group is treated as a single taxable person:

◾ Registered in the name of the representative member, which is an entity selected by the group.

◾ All supplies are treated as being made and received by the representative member.

  • There is reduced compliance reporting where one VAT return is submitted by the representative member on behalf of the VAT group instead of a return per entity.  This would work well if there is a centralised system.
  • The representative member pays the VAT liability for the group and receives the repayment on behalf of the group.
  • Intra-group supplies between members are disregarded for VAT purposes, subject to some exceptions
  • Simpler administration for transactions between the group members i.e. invoices do not have to be raised for transactions between members.
  • Cash flow benefit where there is not a delay between incurring and reclaiming the VAT on supplies between the entities, subject to the normal VAT recovery rules, particularly if the entities’ VAT periods as standalone registrations are not aligned.
  • The inclusion of an entity making exempt or partly exempt supplies may increase its residual VAT recovery, depending on the specific facts for the member and group as a whole.

Disadvantages of VAT grouping:

  • We are aware of delays processing VAT group applications.

◾ Careful planning is required to ensure sufficient time is allowed between submission of an application and the requested VAT grouping date.

◾ If the VAT group number is issued after the requested VAT grouping date, it would not be possible to issue VAT invoices as a group registration or to use the previous standalone VAT numbers in the interim period.  This could create further administrative work with duplicated invoicing i.e. Invoice whilst application in process followed by a replacement VAT invoice when the VAT number is received.

  • A new VAT number is issued when a VAT group is formed and existing standalone VAT numbers cannot be retained i.e. invoices and paperwork needs to be updated, notification to customers or suppliers as required etc.
  • All members are jointly and severally liable for any VAT that the group owes to HMRC.  A member who has left the group remains liable for any debts incurred while they were in the group.
  • An option to tax made by a group member applies to all group members and continues to apply even if that member leaves the group.
  • The inclusion of an entity making exempt or partly exempt supplies may reduce the group’s residual VAT recovery, depending on the specific facts for the member and group as a whole.
  • Where a VAT group is treated as a single taxable person, all the limits and thresholds apply to the group as a whole rather than to individual members e.g. partial exemption de minimis limits, payments on account scheme, error correction threshold etc.
  • There must be an efficient system in place to allow each entities’ monthly or quarterly figures to be reported centrally on time to allow the representative member to combine the figures to prepare and file the group return and settle the VAT payment by the due date.
  • The VAT group position must be reviewed if there is a structural change within the group, to ensure the grouping conditions continue to be met.

Any questions or for advice about VAT grouping, please contact the VAT consultancy team.

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