Partially exempt VAT groups wave goodbye

The consultation period for the government’s proposals on VAT grouping for partially exempt groups has come to an end, and the business community now awaits legislation which, it seems certain, will ignore the many objections to the proposals made on practical and policy grounds.

It seems clear that Customs & Excise has already decided to abolish partially exempt VAT groups and that the consultation was really about how best to effect this, not about the appropriateness of such a change in principle. The fact that the consultation document is entitled ‘Restriction of VAT Groups to Fully Taxable Corporate Bodies’ gave the game away from the start.

Estimates of the VAT lost through the existence of groupings range from #400m to #1bn per annum. This arises largely as a result of VAT not having to be accounted for on supplies between group members within a partially exempt group.

Customs claims this means VAT is being avoided and has therefore proposed the abolition of VAT grouping for partially exempt VAT groups.

The effect of group registration is broadly to treat a group of companies as if it were a single entity, so that if the overall business had been carried on in one company only, the VAT recovery position would have been exactly the same.

It follows that the abolition of group treatment for partially exempt groups will be ineffective to deal with most VAT avoidance schemes: these will merely be (and indeed are already being) adapted to use other structures such as the merger of businesses or the use of partnerships, which enable activities to be brought within a single legal entity and thus achieve the same tax objectives without relying on the VAT grouping.

Only businesses carrying on their normal commercial operations through a group of companies will suffer as a result of the change. The fact that companies in a VAT group can make supplies to each other without paying VAT is not in itself avoidance.

Customs should have devised specific anti-avoidance rules to counter the limited abuses which have taken place. The entire abolition of grouping for partly exempt businesses is a gross over-reaction.

Some financial services VAT groups contain hundreds of companies each of which may in future have to file separate returns, causing severe administrative difficulties for both Customs and the businesses concerned.

Unfortunately, Customs does not appear even to have considered this issue.

It is not only the extra staff and space that will cost more; computer and accounting systems will have to be changed. All at a time when businesses already have the millennium bug and the introduction of the euro to contend with.

The government has committed itself to substantial future increases in public expenditure in reliance on growth estimates which now appear rashly optimistic. In the circumstances, it is not surprising that it is looking to the corporate sector to provide a further pound of flesh.

But the abolition of partially exempt VAT groups, quite apart from being unjustified in principle, will cause administrative costs out of proportion to any additional revenue collected. Is it too late to hope that this ill thought-out proposal may yet be withdrawn?

Stephen Charge is head of tax and Charles Elphicke is a solicitor at city law firm Cameron McKenna.

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