Customs threat to City

The City of London’s pre-eminence in European financial services was threatened this week by a proposal to restrict VAT grouping to fully taxable companies.

VAT experts claimed Customs & Excise’s move, which is designed to save #400m a year, would force big banks and insurance companies to radically restructure their business operations, slashing efficiency in the process.

Barclays Bank alone has a complex VAT group consisting of about 200 entities which would require restructuring.

Chancellor Gordon Brown signalled the clampdown on perceived VAT group abuse in March’s budget. Concerned parties have until the end of September to make submissions on VAT grouping, which allows a UK business group to have a single VAT registration.

Tax professionals warned that Customs’ plan was mis-judged. Peter Jenkins, Ernst & Young’s VAT head, said: ‘If this goes through, it will reduce the competitiveness of the City. It will create an administrative nightmare and an enormous compliance burden.

‘Customs seems to be fixated with the amount of revenue at stake, but that’s ridiculous because a lot of it will disappear as businesses re-organise their group structure.’

Kevin McCormick, Barclays’ deputy tax director and chairman of the English ICA’s VAT committee, said the bank had already considered a re-organisation designed to minimise the VAT cost. ‘The proposal is similar to abolishing groups altogether for the financial sector and will increase administrative costs for us and control costs for Customs,’ he added.

‘Once Customs examines the costs of controlling groups spread all over the country, it will find that that outweighs any additional revenue.’

Tony McClenaghan, Deloitte & Touche’s national VAT partner, said the proposal was purely revenue-driven and could raise up to #1bn for the Treasury’s coffers. ‘This move would hit efficiency at a time when the City is gearing up for the euro and it would undoubtedly damage the City’s competitiveness.’

He added: ‘Customs already has a huge battery of anti-avoidance legislation to combat all the unacceptable avoidance that has taken place.’

Customs defended its controversial proposal, but a spokesman said: ‘This has been flagged up and we want to remove partially exempt businesses from VAT grouping, but if it’s concluded that making this change is not workable, it won’t go ahead.’

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