VAT grouping: call for evidence

Update: The government announced in March 2021 that it would not be taking forward the proposals put forward in the call for evidence and in July 2021 HMRC published its Summary of Responses document.

The Government has published a Call for Evidence on aspects of the UK's VAT grouping rules. The HM Treasury document, "VAT Grouping - Establishment, Eligibility and Registration", seeks industry feedback on a range of specific issues around the UK's VAT grouping rules, including application to branches, eligibility criteria, implementation of the Skandia judgment, compulsory VAT grouping and VAT grouping limited partnerships and Scottish partnerships.

The Call for Evidence is likely to be particularly relevant to businesses in the financial services industry and especially to fund structures which currently rely on HMRC's concessionary treatment to allow a limited partnership to be VAT grouped where the sole general partner of that limited partnership is a body corporate and its role is to manage the limited partnership as a whole. It is interesting that the call for evidence has been issued by HMT, when the issues on which feedback are sought are arguably technical matters that would more usually fall within HMRC's ambit.

Background

The UK rules for VAT grouping implement the provisions of the EU Principal VAT Directive allowing Member States to introduce optional VAT grouping rules. These rules allow entities that part of the same group to be treated as a single taxable person for VAT purposes with associated administrative benefits.

However, there are a number of variations in the implementation of the VAT grouping rules between different Member States. One of these was highlighted in the ECJ decision in Skandia (Case C-7/13), concerning the separate VAT grouping treatment of a fixed establishment of a business and this has created a degree of complexity around intra-EU supplies.

The Government is now seeking feedback on a number of issues to instruct potential reform of the rules going forwards.

Call for Evidence

The first issue raised for comment is the UK treatment of companies with branches in other Member States. At present, the UK treats a company as a single entity for VAT grouping purposes and, as such, it is the whole entity that is VAT grouped with other eligible entities. This is the case even where there is only a fixed establishment of that entity present in the UK. Other EU Member States take a different approach and allow the VAT grouping of a separate fixed establishment only (separate to the entity of which it forms part). This is the scenario that created the complexity in the decision of the ECJ in Skandia concerning supplies of services between a separately VAT group registered fixed establishment and the company of which it formed part. The ECJ held that in that scenario, the well-known principle from FCE Bank that intra-entity transactions do not give rise to a supply is switched off and there is no disregard of VAT for transactions between head office and the branch. This led to HMRC guidance published in Revenue & Customs Brief 2/2015 that where a supply is made between a UK group member and an establishment in another Member State that treats that establishment as a separate entity for VAT purposes, then the supply would no longer be disregarded for UK VAT purposes.  In practice, this need to consider the position in the other jurisdiction has led to practical difficulties for taxpayers in correctly taxing relevant intra-entity transactions, not least as a number of EU27 jurisdictions have similarly changed their approach to these rules in light of Skandia.

Both the UK "whole entity" approach to VAT grouping and also the guidance on the interaction between the UK rules and the Skandia judgment are part of the Call for Evidence. In particular, the Government is requesting feedback on whether the UK should move to the model used by most of the EU in allowing the VAT registration of a branch separate to the company of which it forms part ("establishment only" approach).

The Call for Evidence notes that the UK approach may in some circumstances be used for tax structuring. In particular, "'whole establishment' provisions may encourage companies to organise their internal structures to benefit from the place of supply rules in different countries. It is possible for supplies of legal, IT or administrative services supplied to a fixed establishment in another country to be channelled to the same entity's UK fixed establishment. That supply could then be realised in the UK without incurring VAT as the place of supply to the foreign establishment was outside of the UK. In addition, the document notes that the UK approach may be disadvantageous to UK based groups since whilst services purchased overseas are brought into the scope of VAT where they are used in supplies made to other VAT group companies, supplies of staff are not. Consequently, some groups benefit significantly from services provided by staff in overseas locations to the detriment of UK headquartered competitors.

The second main issue raised by the Call for Evidence is whether the UK should introduce some form of compulsory VAT grouping. At present, the UK rules are optional for companies which meet the criteria for VAT grouping. In addition, there is no requirement that where a group adopts VAT grouping that all eligible entities within the group must be included.

The document notes that in certain jurisdictions outside of the UK, where the relevant conditions are met VAT grouping is compulsory for specific sectors. Compulsory VAT grouping may offer administrative easements and level the playing field for businesses who would then all operate under the same VAT treatment. Other jurisdictions operate an 'all in or all out' model where VAT grouping is optional, but if it is adopted for one entity, all related entities who meet the relevant conditions must also be part of the same VAT group. It seems that the Government is attracted to some form of restriction on the current discretionary nature of VAT grouping, noting that compulsory VAT grouping provisions "could be utilised alongside 'establishment only' VAT grouping provisions to prevent manipulation of structures to obtain the optimum VAT position.  Whilst on the face of it one can understand the Government's position, such a compulsory VAT grouping requirement will cause issues, for example under financing arrangements which rely on borrower entities within wider corporate groups being separately VAT registered to avoid the borrower being jointly and severally liable for VAT of the wider group. Equally, banks that are subject to ringfencing may need to review their analysis given the effect that such compulsory VAT grouping might have on the liability position of the ringfenced bank.

Finally, the Call for Evidence considers the potential for further extending the eligibility of VAT grouping to certain limited partnerships and Scottish partnerships. The UK rules were extended in 2019 to include individuals, partnerships and Scottish partnerships, provided they control all other members of the VAT group following the ECJ decision in Larentia + Minerva (Case C-108/14). Whilst other extensions had also been considered at that time in light of the decision, those were not ultimately legislated.  However, the document notes that HMRC has long operated a concession to allow a limited partnership (LP) effectively to join a VAT group where the sole general partner of that LP is a body corporate and its role is to manage the limited partnership as a whole. Equally, in order to avoid regional disparities, HMRC has operated a concession where, provided that the sole general partner of a Scottish limited partnership (SLP) is a corporate body, the SLP can join a VAT group even though the SLP itself has legal personality.

The document notes that the current concession is however a departure from the principles underpinning VAT grouping provisions. It also does not address situations where there is more than one general partner. As such, the document requests views on a range of questions around the current operation of the concession including the commercial rationale for inserting LPs and SLPs into VAT groups situations as well as any commercial rationale for there to be more than one general partner.

Given the importance of the current concession to many private fund structures, any changes are likely to be significant to the industry.

Comments

Responses to the Call for Evidence should be sent by 20 November 2020 to HMTVATandExcisePolicy@hmtreasury.gov.uk.