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HMRC to consult on new VAT grouping rules 'in spring 2016'


The UK tax authority has set out the changes it will need to make to the laws governing 'grouping' for VAT purposes, ahead of a consultation planned for spring 2016.

The changes are needed to take into account a ruling by the EU's highest court last year, which extended the types of entities that could be included in VAT groups beyond merely bodies corporate, according to a briefing note published by HM Revenue and Customs (HMRC). It will also use the consultation process to gather the views of UK businesses about other grouping-related matters, such as those raised by the Skandia case in 2014, it said.

"This information will help inform future discussions with the European Commission and other member states," HMRC said in its briefing note.

HMRC expects to make a number of changes to the UK's rules on VAT grouping following the consultation, according to its briefing note. These are likely to include extending VAT grouping to non-corporate bodies, and identifying new rules to determine 'close economic, financial and organisational' links for corporate and non-corporate bodies, it said.

It will develop prospective policy options in consultation with business representative bodies during the first few months of the year ahead of a formal consultation in the spring, it said. Final proposals will emerge over the summer and autumn.

"This will be a major consultation, following on from the CJEU's judgments in the Skandia and Larentia cases, along with continuing UK litigation in the MG Rover and Standard Chartered cases," said Darren Mellor-Clark, a VAT and indirect taxes expert at Pinsent Masons, the law firm behind Out-Law.com.

"VAT grouping, along with its conditions, use and limits, promises to be a key area of concern for taxpayers as we move forward. The planned consultation should be welcomed as a genuine opportunity to influence HMRC's policy making as VAT legislation evolves for the new landscape," he said.

EU VAT rules allow member states to group two or more businesses established in the territory of that member state into a single taxable person for VAT purposes, providing that those businesses have close economic, financial and organisational links. UK VAT grouping rules are set out in the 1994 VAT Act, and allow two or more companies or limited liability partnerships to register as a VAT group as long as each is established in the UK and they are under "common control".

In July 2015, the Court of Justice of the European Union (CJEU) gave its judgment on two linked cases involving the VAT treatment of deal fees and other costs relating to corporate takeovers referred by the German courts. Not only did it find that these costs had a "direct and immediate link" with the holding company's economic activities, it also found that member states could only limit VAT group membership to legal persons where those restrictions were appropriate and necessary in order to prevent abuse, avoidance or evasion.

From a UK perspective, changes to the law will be needed to extend VAT grouping to non-corporate bodies, such as partnerships that are not limited liability partnerships. HMRC has also proposed replacing the current "control" test in the 1994 VAT Act, which is based on a company law definition of a subsidiary, with a new test based on the CJEU's concept of 'close economic, financial and organisational' links.

In September 2014, the CJEU ruled that services supplied by the US headquarters of Skandia, the insurance business, to a Swedish branch which was VAT grouped with other local companies were subject to VAT. The court said that because the branch of the US company was a member of the VAT group, it could no longer be treated as being the same legal entity as its US head office for VAT purposes. A similar scenario would not have occurred in the UK, which has different rules on 'establishment', but the decision has had an impact on UK firms that operate in Sweden and in other countries where the tax laws work in the same way.

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