Your clients may operate their trade through multiple legal entities. This usually means there will be trading activity between the different businesses. Why might a VAT group be beneficial to such clients, and how does this affect any intra-entity activities?

Background – benefits of a group

The main benefit of a VAT group is to save time and administration costs for your clients because only one VAT return is submitted for the whole group.

If your clients decide to apply for a VAT group registration, then all existing VAT numbers are cancelled by deregistration.

The standalone registrations will deregister on one day, and then the new VAT group takes effect the following day. It is not possible to retain the same VAT number.

Pro advice. The relevant form to deregister your clients is VAT7 , (see Follow up ) and you should tick the box for “I am joining a VAT group” in question 6 as the reason for deregistration.

Intra-member activity

The other key advantage is that trading between group members is ignored for VAT purposes, i.e. no output tax is charged on inter-company supplies. This can produce a VAT saving if a member receiving goods or services from a group member is partly exempt.

Example. ABC Ltd is partially exempt because it makes exempt supplies of financial services. DEF Ltd makes an annual management charge of £100,000 to ABC, as a contribution from ABC for shared overheads paid by DEF. If the two companies are not in a VAT group, the £20,000 VAT charge by DEF Ltd would be partly input tax blocked for ABC because it is a partially exempt business.

Pro advice. When you consider partial exemption for a group registration, always check the link between an expense from a supplier and the third-party income it generates from customers outside of the VAT group, rather than any onward supply to a group member. Also, the partial exemption de minimis limits apply to the group as a whole, i.e. each member does not get its own de minimis limit.

Example. DEF Ltd from the above example has purchased a new computer system for £50,000 plus VAT and made an onward sale of the system to ABC Ltd. No VAT has been charged because it is a supply within the VAT group. In this situation, the relevant issue for input tax purposes is not the onward sale by DEF Ltd (this is ignored) but how ABC will use the computer system. If it is wholly used for ABC’s exempt activities, the £10,000 VAT on the purchase invoice issued by the computer supplier to DEF will be input tax blocked.

Let’s consider which of your clients are eligible to set up a group, and how to do it.

Who can join a group?

The opportunities for group registration increased on 1 November 2019. In some cases, an unincorporated business can now join a group. Prior to this, only incorporated businesses, i.e. companies and limited liability partnerships, established, or with a permanent establishment, in the UK could join a VAT group.

Pro advice. There is no problem with a company incorporated outside the UK belonging to a VAT group as long as it has a fixed establishment in the UK per VAT Notice 700/2 (see Follow up ).

Control condition

Before you decide if your clients can form a VAT group, you need to ensure that the control conditions are met. This means that one member (or a non-group member) controls all of the other members. In many cases, this will be a typical parent company and subsidiary arrangement, but it is also acceptable if all members are controlled by an individual person or group of persons operating as a partnership.

Example 1. Tom owns 100% of the share capital in two companies. The first company trades as a florist and the other offers computer consultancy services to the insurance sector. Tom’s control of both companies means that the companies can form a VAT group. The fact that the two companies have very different trading activities is irrelevant.

Example 2. Dick and Harry each own 30% of the share capital in A Ltd and B Ltd. Despite the fact that their combined shareholding exceeds 50%, the two companies cannot form a VAT group because no single person or entity controls both companies. However, if Dick and Harry jointly owned 60% of the share capital (or any percentage of 51% of more), i.e. as a partnership, a group registration could be formed.

Application forms

You need to ensure that you complete the correct forms to successfully submit a group registration for clients.

VAT1 (see Follow up ). This is the usual application form to register for VAT, which must be signed by the representative member.

VAT50 (see Follow up ). This is completed for each global group application and should be signed by either the applicant company or the person controlling the group, e.g. Tom in example 1 above.

VAT 51 (see Follow up ). Completed by each individual group member and signed by the same person who signed the VAT50 .

Pro advice. The representative member can be any group member, it does not have to be the company that controls the others or has the highest turnover. It will usually be easy to establish which company should be the representative member. The registration will be in the name of the representative member.

Charity opportunity

There is no problem with a company joining a VAT group that only has exempt or non-business income. Similarly, it’s not an issue if the only taxable supplies being made are within the circle of the group. This arrangement can produce a VAT saving for some charities.

Pro advice. In situations such as this, VAT returns submitted by the group will be “nil” returns if the group earns no taxable income from customers outside the VAT group.

Changes to group membership

If new members join a VAT group in the future, or existing members leave, then your clients will need to complete a new VAT50 and VAT51 for each change. It is important to be clear about the date when the change was made. If there are only two members in a group, and one leaves, then the group will need to deregister because a VAT group must have at least two members.

Joint and several liability

A potential disadvantage of your clients forming a group is that each member is jointly and severally liable for the VAT debts of the group to HMRC.

This might be a downside if, say, your clients have a trading company and a separate company in the group that holds a big property asset. If the trading company fails to pay its VAT liability to HMRC, then the property is at risk.

Sole traders and partnerships

Since 1 November 2019, non-corporate businesses can now belong to a group but only if certain conditions are met. The first condition is that a partnership or sole trader business must be capable of registering for VAT as a stand-alone business, i.e. because it is either making or intending to make taxable sales.

Secondly, an individual or partnership can only belong to a VAT group if they control all of the corporate members of the group, e.g. 51% or more of the issued share capital. For example, a husband and wife trading partnership jointly owning all of the shares in two limited companies could form a VAT group consisting of all three entities.

A group registration will save time for your clients because only one VAT return needs to be completed each period. No VAT is charged on supplies between group members, which can be a VAT saver if the business receiving the goods or services is partly exempt.

Follow up

Form VAT1
Form VAT51
Form VAT50
VAT Notice 700/2
Form VAT7