VAT grouping and partnerships

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        <h3>Update</h3>
        <p><span style="font-size: 13px;">Provisions have been included in Finance Act 2019. In the meantime, the FTT has held that the UK VAT grouping rules must be interpreted in conformity with the ECJ decision in <em>Larentia + Minerva</em>: see ""<a href="http://www.elexica.com/en/legal-topics/tax/110719-partnerships-and-vat-grouping-ftt-decision">Partnerships and VAT grouping: FTT decision</a>"</span></p>
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HM Revenue & Customs (HMRC) is currently undertaking an informal consultation with a number of industry bodies and trade associations on a potential extension of the VAT grouping rules to partnerships and individuals in a restricted range of circumstances. The proposals currently being considered would have the advantage of retaining the UK’s current eligibility criteria for VAT grouping, but at the expense of restricting the extension of VAT grouping to specified scenarios, at least initially.

Background

The VAT grouping rules are based on EU law and allow Member States to treat businesses as a single taxable person if those businesses have close economic, financial and organisational links. The VAT grouping rules have been the subject of a number of recent decisions of the European Court of Justice (ECJ) which have raised concerns about the compatibility of the UK VAT grouping rules or the way in which the UK rules interact with those in other jurisdictions.

The UK restricts VAT grouping to “bodies corporate”. However, the decision of the ECJ in Larentia + Minerva indicated that Member States may not restrict VAT grouping to entities having legal personality, unless it is justified by the prevention of abusive practices, tax evasion or avoidance. It is, therefore, necessary for the UK to consider whether there is a requirement to extend VAT grouping to other entities, such as partnerships. This raises questions over the suitability and compatibility of the UK’s test for VAT grouping eligibility. The UK applies a “control test” based on Companies Act tests, which is that all members of the group are controlled either by one member of the group, or a single other ‘person’ who is not one of the members of the group ie a “vertical grouping” test based on a single controlling body or person at the top.

As a result, HMRC launched a formal consultation on the future of the VAT grouping rules in December 2016 (see “VAT grouping consultation released”). One particular element of the consultation concerns the possible extension of the rules to non bodies corporate following the Larentia + Minerva decision.

Informal consultation

HMRC are now carrying out an informal consultation with a number of professional bodies and trade associations with regard to options for expanding the VAT grouping rules to certain partnership and sole trader arrangements. In particular, the informal consultation seeks their views on three particular circumstances where HMRC are considering extending VAT grouping to partnerships:

• Allowing a partnership or an individual sole trader to join a VAT group with its, his or her body corporate subsidiaries where it, he or she controls all the members of the VAT group
• Allowing a partnership to join a VAT group where all the partners in the partnership are bodies corporate and all are currently in a VAT group
• Allowing a UK established limited partnership to join a VAT group where the sole general partner is a body corporate and manages the limited partnership. This change would formalise existing HMRC practice under which an English (but not a Scots) limited partnership's business activities are treated as carried on by the general partner and so can be treated as taking place within the general partner's VAT group. In this case, there is a suggestion that HMRC may accept that this treatment should not be limited to English limited partnerships.

Comment

Whilst expansion of the scope of VAT grouping to other entities that have close financial, economic and organisational links is, in principle, welcome, there have been concerns that any changes to the existing control test used by HMRC to determine eligibility should not be to the detriment of the certainty provided by that test. In addition, responses to the consultation indicated that to the extent there was a change to the relevant grouping test (which, being based on the Companies Act control tests, arguably do not capture “close financial, economic and organisational links”), any existing VAT groups should be grandfathered, preferably on an open-ended basis.

As such, HMRC’s current proposals for a limited extension without any need to change the control test would remove that concern, albeit at the expense of implementing only a restricted extension of the current grouping rules to certain partnership and sole trader arrangements. In part, the narrow scope of the current proposals is informed by concerns on the part of HMRC over risks of abuse, notwithstanding the existing legislation that allows HMRC to include or exclude entities from VAT groups where there are abusive arrangements.

HMRC has requested responses to the informal consultation by 16 March 2018, with the intention of using the feedback in deciding how to extend VAT grouping. It is also meeting with stakeholders. If HMRC decides to make legislative changes it has indicated that there will be a further technical consultation on draft legislation in 2018.