Sometimes it is not easy to explain the reasons behind the numerous restrictions in the VAT law and regulations. For example: why can only corporate bodies and LLPs can be part of a VAT group?
This element of VAT law was challenged in the European Court of Justice (CJEU) in two cases: Larentia & Minerva and Marenave in 2015. As a result of the CJEU ruling HMRC consulted on changes to the VAT group rules, and amended the law in FA 2019, which comes into effect by regulation SI 2019/1348.
From 1 November 2019 the head of a group of corporate bodies (companies and LLPs) will be able to join a VAT group containing those bodies if it controls all of the corporates in that group.
The head of the group can be an individual, a partnership, a Scottish partnership, or a trust, but in every case it must occupy the position of parent company of the group as if it were the holding company. The head of the group must also have a business establishment in the UK.
The non-corporate head of the group must be making or intending to make some VATable supplies in the UK on its own account, in other words it must be trading, even to a small extent, to be eligible to be registered for VAT in the UK. This is a different requirement to the conditions for a holding company, which does not have to have its own trade to be part of the VAT group.
The main advantages of operating as a VAT group are:
- transactions between the bodies within the group do not carry VAT and don’t have to be reported for VAT purposes;
- a single VAT return is completed for the whole group.
The main disadvantage is that all members of the VAT group are jointly and severally liable for any VAT debts of the group.
For more guidance on the operation of VAT groups see VAT notice 700/2.