New VAT powers threat

Customs & Excise wants sweeping new powers to break up VAT groups, which tax experts warn could cost companies millions and create huge commercial uncertainty, it emerged this week.

Customs signalled its desire for new powers to vary the composition of VAT groups in meetings during October with taxpayers and advisers.

The meetings centred on the controversial proposal, which was announced earlier this year, to ban VAT groups for banks and insurers which, according to those who attended the meetings, Customs now wants to drop in the face of overwhelming opposition.

This news will come as a relief to banks and insurers, which face massive restructuring costs if their right to form VAT groups is stopped.

However, tax experts who attended the meetings warn Customs is now seeking new powers over the formation and membership of VAT groups, which could hit VAT groups in all sectors.

Peter Jenkins, VAT partner at Ernst and Young, said: ‘Insurance and banks will be relieved Customs is listening to the overwhelming weight of objections about what was an ill-thought-out proposal. But they will be extremely concerned at the alternatives Customs is considering.

In particular, increases in its powers to vary composition of existing groups for the protection of revenue, if they go through, could create great uncertainty in commercial transactions and deals.’

Martin Sharrat, VAT partner at Arthur Andersen, said: ‘In the face of massive opposition I would be amazed if it goes ahead with its main proposal to restrict VAT grouping rights for banks and insurers. But it has gathered a lot of information in the consultation process and it is likely to use it to tighten up on procedures.’

Any decision by Customs to drop its main proposal will be well received by insurers and banks. Barclays deputy tax director, Kevin McCormick, said: ‘We would be very pleased if the main proposal was dropped.’