Is your VAT group still valid?

The news that Barclays Bank faces a tax demand of £184m in backdated VAT should serve as a powerful reminder of the importance of compliance with VAT group requirements.
 
HMRC’s claim, revealed in Barclays’ interim results announcement, appears to relate to potential flaws in its VAT group involving overseas subsidiaries with operations in the UK. Barclays may well challenge the assessment, but the case indicates HMRC’s current interest in both VAT groups and partially-exempt entities.
 
Large financial services organisations, such as banks and insurance companies, typically receive some form of service from a group company outside the UK. Back office functions could often be handled more cheaply, for example, if provided by teams in lower cost jurisdictions. However, there are also strong advantages from including these group companies in the UK VAT group. Supplies between members of a VAT group are outside the scope of VAT, which means that no VAT charge arises on the cost of the service. There is no problem of unrecoverable VAT on inter-company transactions. Once an entity belongs to a VAT group, then all transactions between that entity and other group members are outside the scope of VAT.
 
There are, of course, certain conditions that must be met in order to join a UK VAT group. In particular, an overseas company must have a ‘fixed establishment’ in the UK – it must have a degree of permanence in terms of UK-based human and technical resources sufficient to make or receive supplies outside of the VAT group.
 
Based on Barclays’ experience, it seems that VAT groups are in HMRC’s sights as it seeks to boost tax revenues. The tax authority has details of all participants of any VAT group, and so has the ability to identify potential candidates to challenge.
 
Historically, some organisations may have established the bare minimum presence necessary in the UK to achieve fixed establishment status and so gain entry to a VAT group. If HMRC is now taking a tougher stance to VAT group eligibility, or at least paying more attention to potential breaches of the requirements, these structures could now be particularly vulnerable.
 
Every organisation would therefore be well advised to consider whether their VAT group is likely to resist a challenge from HMRC. Any organisation with an overseas entity within its VAT group should check that the fixed establishment criteria still apply. Has anything changed that might weaken its case?
 
How we can help
Please get in touch for further advice. Moore Stephens experts can conduct a VAT group review to identify any potential issues with the fixed establishment criteria, while also considering any advantageous restructuring opportunities.
 

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