VAT grouping consultation – no changes expected following sector response

HM Treasury (HMT) have decided not to consult further on possible changes to UK VAT grouping rules following responses to the recent call for evidence. The NHF and RSM had responded on behalf of members, and also had the opportunity to share the concerns of the sector in a follow up meeting with HMT and HM Revenue and Customs (HMRC) representatives.

VAT grouping allows two or more eligible entities to be treated as a single taxable person for VAT purposes. Supplies between VAT group members are disregarded for VAT purposes. Many housing associations use VAT groups to remove irrecoverable VAT costs on intragroup supplies, to maximise the benefits of the cost sharing VAT exemption relief and ring fencing development costs outside of a VAT group to protect input tax recovery.

You may recall that in August 2020, HMT released a call for evidence consultation document concerning VAT grouping rules in the UK. The call for evidence covered three areas:

• The establishment provisions.
• Potential issues arising from the introduction of compulsory VAT grouping in the UK.
• Grouping eligibility criteria for entities not included in the current legislation, including limited partnerships.

RSM and the NHF worked together to provide a joint response on behalf of all members. We would like to thank the many of you that contacted RSM and helped to formulate the sector’s response, as well as those members who participated in the follow up meeting with representatives from both HMT and HMRC.

It was quickly identified that compulsory VAT grouping would have a significant impact on the sector. RSM and the NHF were able to provide HMT with compelling evidence as to why maintaining flexibility regarding who should be included in a VAT group was important.

A survey of NHF members highlighted that:

• Additional VAT costs could lead to 18,621 less affordable homes being developed each year.
• The cost sharing VAT exemption relief would become void.
• There are at least 47 housing associations participating in six cost sharing entities.
• Compulsory VAT grouping could result in some of these cost sharing entities no longer meeting the eligibility criteria which would result in additional VAT costs of up to £4.6m a year.

In the sector’s response, we recommended that the government should maintain the current position that allows organisations to decide whether they wish to form a VAT group, and if so, which entities should be included. HMT confirmed in the Budget that that they do not intend to take this matter any further and VAT grouping rules are expected to remain unchanged. We hope that this is a relief for all our members and shows the power we have when working as a collective group.

Whilst this is great news, it should be noted that HMRC still continue to challenge the sector where a VAT group is in place, for example, we are aware that HMRC have challenged a VAT grouping structure that includes a cost sharing entity, arguing that it is distorting competition. This is not correct, as the VAT grouping relief is there to allow exactly those savings. Challenges like this from HMRC can usually be successfully disputed, we recommend seeking external advice before agreeing with any HMRC VAT challenge you think could be wrong.

RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.