VAT Grouping – Call for Evidence

10 December 2020

HM Treasury has released a Call for Evidence in relation to VAT grouping, and in particular the criteria relating to establishment, eligibility and registration. The NHF has responded to this on behalf of its members, with the help of tax advisers RSM, who explain the detail behind this consultation here.

VAT grouping enables two or more eligible entities to be treated as a single taxable group for VAT purposes. In order to be eligible for VAT group registration, a business must either be established in the UK or have a fixed location in the UK from which it operates.

HM Treasury is considering whether it should continue to utilise what is known as the ‘whole establishment’ provisions, where entities in the UK or abroad can form part of a VAT group, or limit the opportunity to form a VAT group to those that are established in the UK. This would mean that supplies between a company’s UK headquarters and, for example, its French trading branch would no longer be outside the scope of UK VAT.

UK group entities currently have the option to either have an individual VAT registration or be included within a VAT group registration. This gives businesses under common control the option to choose a form of VAT registration that works best for them.

For example, some groups may choose to have two or more group companies registered as a VAT group, while other entities in the group are registered separately. HM Treasury is considering whether compulsory group registration should apply where there is common control, or whether it should be limited to either a single VAT group registration or individual registrations.

There is also currently a concession that allows limited partnerships and Scottish limited partnerships to form a VAT group, and HMRC is considering whether this should be moved onto a legal footing.

How this might affect the social housing sector

It is important that the social housing sector considers these proposed changes carefully. The imposition of compulsory VAT grouping, or a choice between single VAT group registration or individual registrations, could have a significant impact on the sector.

For example, where a housing association has a large development programme it is often the case that they have a subsidiary that acts as a development company. This company buys in legal and professional services as well as construction services and makes a single zero-rated supply to (usually) the housing association parent.

This effectively removes irrecoverable VAT costs incurred on legal and professional fees where the development has a large social housing element. Compulsory VAT grouping would remove the benefits of this arrangement and result in increased VAT costs for developing housing associations.

We are also aware that, in relation to financial covenants, some lenders require that entities are not VAT grouped because of the joint and several liability provisions, where each VAT group member is jointly and severally liable for the VAT debts relating to other VAT group members. Compulsory VAT groupings could result in housing associations being in breach of their financial covenants. It is issues such as these that the NHF has brought to the attention of HM Treasury in its response.

We are extremely grateful to all those that responded to our request for input which have helped us to formulate the response to the consultation. It is clear from the high number of representations we received that this is an important issue for the sector.