Summary: VAT grouping provides administrative savings for business and creates an advantage for businesses that make exempt supplies. This is because, without VAT grouping, they would incur VAT on purchases from closely-linked entities but may be unable to recover this as input tax.

Currently, the UK VAT grouping legislation allows two or more bodies corporate (including LLPs) to register as a VAT group if each body is established in the UK and they are under common control. The Finance Bill introduces amendments which allow individuals and partnerships, subject to certain conditions, to join a VAT group.

The proposals

In 2015, the CJEU decisions in Larentia + Minerva and Marenave (C-108/14 and C-109/14) made it clear that a Member State may not restrict VAT grouping to those entities which have legal personality, unless it is justified by the prevention of abusive practices, tax evasion or avoidance.

Accordingly, the government is now extending grouping eligibility beyond  corporates to allow non-corporate entities (e.g. partnerships or individuals) to join a VAT group with its corporate subsidiaries if it controls all of the members in a VAT group.

In more detail: the measure will widen the eligibility criteria for VAT grouping to include non-corporate entities which have a UK business establishment and control a body corporate. In determining whether there is a business establishment in the UK, the test for business establishment for place of supply should be used. The non-corporate entity must also demonstrate that it controls all of its corporate subsidiaries.

There are several oddities about the relevant clauses.  First, it is surprising that the Finance Bill does not simply remove the restriction that currently limits VAT grouping to corporates. That would certainly reflect the thinking of the CJEU in the cases mentioned above. Secondly, it is odd that the territoriality test is limited to business establishments, and does not also cover fixed establishments of individuals and partnerships.

On final point is that it remains to be seen whether, and if so how, the new rules will impact on limited partnerships, where HMRC’s long-standing policy is to VAT register the GP or GPs, and to effectively ignore the limited partners.