The VAT rules allow different businesses to be part of a group registration if they can meet the conditions. Is this something you should consider, and if so what are the pros and cons of VAT groups?
Registered person
It’s usual to think of businesses being registered for VAT, but actually it’s the “person” that’s registered. That means when a sole trader registers all their businesses are covered by the same VAT number. Similarly, because a company counts as a person in law all its activities are covered by the same registration. However, that isn’t the case for connected businesses even if they have the same owners. Usually they have individual VAT numbers and submit separate returns.
Inter-company transactions
If you own more than one business and they each make supplies to one another (including management charges), they must treat them like normal sales and purchases to or from third party businesses.
Trap. If your businesses have different VAT return dates because of their separate registrations it can detrimentally affect cash flow.
Example. Acom Ltd and Bcom Ltd are owned and managed by the same individuals. Acom incurs overheads on which it pays VAT. It recharges some of these costs to Bcom and adds VAT. In the quarter ended 31 March 2020 Acom recharges costs of £20,000 plus £4,000 VAT. It accounts to HMRC for this on 30 April 2020. Bcom reclaims the VAT on its VAT return for the quarter ended 31 May 2020 for which it receives credit on 27 June 2020. Therefore, Acom is out of pocket for the VAT until Bcom pays its bill and Bcom is out of pocket until it receives credit on its VAT return.
Tip 1. Acom and Bcom could get around the timing issues by planning their invoicing better. However, a better solution might be to register the companies as a VAT group.
Tip 2. Businesses in the same VAT group can bill each other without adding VAT, thereby avoiding the cash flow problem explained in our example.
Other pros and cons of VAT Groups
Before creating a VAT group consider how it might affect the amount of VAT on purchases each business in the group can reclaim. For example, if one company makes exempt supplies it can cause a restriction (under the partial exemption rules) in the VAT others in the group can reclaim. Conversely, it might improve VAT recovery for the business making the exempt supplies.
Tip. If you expect that including a particular company etc. in a group registration will result in a reduction in the overall VAT on purchases which can be recovered, you can leave it out of the group. There’s no obligation to include all your companies.
Join the club – if you qualify
Until 1 November 2019 only incorporated entities, e.g. companies, operating in the UK and controlled by the same individuals could be part of a VAT group or VAT groups. Since then a sole trader or partnership can also be part of a VAT group as long as it will include one or more companies, and the individual or partnership controls at least one company in the group.