The ins and outs of VAT groups

Tax Talk - April 2022

read timeRead time: 3 mins

Ongoing VAT grouping uncertainties, including recently issued HMRC guidance and ongoing litigation, mean you should ask a VAT expert to double-check your thinking around VAT group changes / accounting before acting.

The comedian Groucho Marx famously quipped, “I don’t want to belong to any club that will accept me as a member”. Although corporate entities have always been able to join a VAT group, subject to certain conditions, individuals (and partnerships) have only been eligible since 1 November 2019. So Groucho’s reluctance to join such a ‘club’ wouldn’t have been so easy anyway.

VAT group delays

Currently, joining an existing VAT group or forming a new one is proving difficult for everyone. The Pandemic has created a backlog of VAT group registration applications. Processing times are so behind that HMRC has been compelled to issue guidance (in the form of updates to VAT Grouping Notice 700/2) to address complications arising from the delays.

Although HMRC’s latest guidance is helpful, it doesn’t get around the fact that each situation has its own nuances that need careful consideration.

VAT issues on intra-group supplies

Another challenge is the VAT accounting treatment of inter-company charges when there have been changes to the constitution of the business’s VAT group.

The main advantage of VAT grouping is that it avoids a VAT liability on intra-group supplies. This is an important facility if the recipient cannot recover any or all of the VAT it incurs and was highlighted in a recent topical First Tier Tribunal case, The Prudential Assurance Company Limited v HMRC.

Prudential, a regulated life assurance company, was the representative member of a VAT group that included Silver Fleet Capital Ltd (“SCL”). SCL provided investment management services to Prudential. The consideration that SCL received comprised two elements; a management fee calculated by reference to the amount of investments made and a deferred performance fee payable in the event that the performance of the funds exceeded a set benchmark rate of return.

As SLC was a member of Prudential’s VAT group during the period when it provided investment management services, it did not charge VAT on those services. However, by the time the performance fee was triggered, SCL had left Prudential’s VAT group and separately registered for VAT. SCL consequently charged VAT on the significant performance fees.

Prudential is a partially exempt business and would have been unable to recover the VAT incurred on the SCL performance invoices. Unsurprisingly, Prudential argued that the performance fees were consideration for the services SCL provided while it was a member of Prudential’s VAT group and as a result should be disregarded with no VAT due.

HMRC maintained that SCL’s services should be characterised as a continuous supply of services under SI 1995/2518 regulation 90 and therefore the tax point or time of supply was when an invoice was issued or consideration received. As SCL was no longer a member of the Prudential VAT group at the time it invoiced for its performance services, VAT was chargeable.

The First Tier Tribunal ruled that SCL’s business was deemed to be carried on by the representative member whilst it was in the VAT group and consequently SCL was not a ‘taxable person’ during that period. As there was no supply within the scope of VAT, the time of supply rules were not applicable and no VAT was due. Predictably however, HMRC has appealed the case to the Upper Tribunal and a common sense approach remains elusive for the taxpayer.

PKF VAT team understands that what many businesses need right now, on these fast changing and complex issues, is practical, bespoke advice that meets the needs of each business’s particular circumstances.

Written by Natalie Braier in our London office.