HMRC has recently released new guidance on the application of a targeted anti-avoidance measure designed to remove VAT-free treatment for supplies into the UK from overseas members of partly exempt VAT groups.

Under s43(2A) of the UK Value Added Tax Act, a supply within a VAT group is deprived of its VAT-free status when supplied by a non-UK-based VAT group member to a UK VAT group member where (i) the overseas member has procured taxable services from third party suppliers ("bought-in services") which it then uses to make the onward intra-VAT group supply, and (ii) that intra-VAT group supply would otherwise be a taxable supply in the UK.

The aim of s43(2A) is to target a VAT avoidance mechanism whereby services are routed through an overseas member of a VAT group in order to benefit from a VAT-free recharge back into the UK VAT group. Such services would have created a VAT cost if procured directly by the UK VAT group.

HMRC previously operated a concession where, if a s43(2A) charge was triggered, HMRC accepted that the value of the deemed supply could be based on the value of the bought-in services only. The effect of this concession was to make it no more or less attractive to procure services directly rather than routing bought-in services through an overseas VAT group member.

This HMRC concession has now been enacted in UK VAT legislation, and it has also prompted HMRC to provide more detailed guidance on its application.

In particular:

  1. HMRC accepts that when determining the value of bought-in services, only those services that constitute a direct and immediate link to the onward supply by the overseas VAT group member (rather than overhead costs) are taken into account; and
  2. where the value of the bought-in services is minimal, no s43(2A) charge is triggered. There is no set rule for what constitutes "minimal", but as a rule of thumb, if the value of the bought-in services as compared to the overall recharge is less than 5 percent, then HMRC will generally accept this as minimal.

This revised HMRC guidance is welcomed, particularly as it confirms that an overseas member of a VAT group will incur genuine overhead costs that should not be caught by the scope of the s43(2A) charge. This revised guidance will be published by HMRC in due course.