VAT - The European Commission requests the UK to modify its legislation regarding VAT grouping

On 20 November 2009, the European Commission formally requested the UK (amongst selected other member states) to amend its legislation permitting a non-taxable company to be a member of a VAT group. The EU Commission believes that the UK legislation is based on criteria different from, and inconsistent with, those employed in the EU VAT Directive. The EU commission believes that only ‘taxable persons’ should be entitled to form a VAT group – this could, for example, lead to dormant companies or holding companies being excluded from VAT groups in the future.  This would represent a significant shift in the way many businesses – notably those in the financial services sector – are arranged.

The UK government has two months to amend the offending UK legislation; otherwise the Commission may decide to refer the matter to the European Court of Justice (ECJ).

“This could result in many holding companies that are currently in a VAT group to be removed from their VAT groups. As a result, they could be hit with a VAT cost of many thousands of pounds. This will be a major concern to UK businesses and groups that are partly exempt or not able to recover their VAT in full, including many groups in the financial services, charities, and housing association sectors, but it could also increase costs for quoted holding companies of trading and manufacturing groups, ” said Martin Sharratt, VAT director at Smith & Williamson, the accountancy and investment management group.

“This news will be a serious concern and lead to a massive increase in irrecoverable VAT for many businesses at a time when firms are just beginning to recover from the recession. It will be very interesting to see how the UK government responds,” continued Martin.

“At the very least firms will need to urgently review their group structures and consider how this move by the European Commission could affect their VAT costs. Some businesses may need to restructure and they should start planning accordingly.”

“HMRC is likely to seek consultation with relevant business sectors and organisations should be sure to make their views heard.”

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Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.

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