The Effect of the Budget on VAT Groups

The Effect of the Budget on VAT Groups

The present Chancellor has made much of his "spend to save" policies, which have the objective of protecting the revenue and avoiding taxes being lost by tax planning. This policy has now been extended to cover VAT group registrations.

The 1999 Budget and the recently published Finance Bill have outlined the legislative changes in respect of section 43 of the Value Added Tax Act 1994, concerning VAT group registrations. These changes include both administrative amendments and legal measures to increase the power of the Commissioners of Customs & Excise to limit the eligibility of companies applying for membership of VAT groups.

1. Applications for VAT group registrations will be effective from the date they are received by Customs & Excise. This replaces the current law that requires applications to be made 90 days before the registration is required. This aspect is an improvement, as businesses will no longer be expected to wait for three months while Customs & Excise process an application.

However, despite the registration taking immediate effect the Commissioners have been given the power to revoke it within 90 days, if they consider that the company applying does not meet the criteria of eligibility or presents a risk to the revenue. If such authority is revoked it will be deemed that the authority had never existed. This will have the effect of requiring separate VAT registrations for the member or members considered ineligible, and the VAT will have to be accounted for by the member or members of the group on transactions between associated companies and third parties.

2. The Commissioners of Customs & Excise have been given the power to remove a company from a registered VAT group when it ceases to meet the eligibility requirements. The date of the removal from the VAT group registration will be decided by Customs & Excise. This may be the date when the company became ineligible, the date Customs & Excise notify the members of their decision being a current date, or a future date when the Commissioners considered it to be appropriate.

3. If the Commissioners remove a company because they perceive it to be a threat to the revenue, it will be removed from a date which will have to be notified in writing by the Commissioners. The specific circumstances appertaining to the Commissioners' use of their powers to protect the revenue will be published in a Statement of Practice, which should be released in July 1999.

The problem with this procedure is that the Finance Bill may well become law before the Commissioners have issued their Statement of Practice. Therefore, until the statement of practice is published, one can only "second guess" the criteria that will be used. Moreover, as the criteria for removal are the key elements to these new rules, by putting them into a statement of practice rather than primary legislation the most important issue is going to be settled in a manner that escapes the scrutiny of Parliament.

However, it can be anticipated that this power will be used when the Commissioners believe that tax avoidance is occurring, that the revenue due may not be collectable or the revenue lost is unacceptably high and cannot be accepted as a normal consequence of VAT grouping.

4. The Finance Bill also outlines a change in the "territorial limitations" of grouping and how these are to be measured. From Royal Assent, all members wishing to be included in a VAT group registration will have to have a "fixed" establishment in the United Kingdom or will need to be "established" in the United Kingdom. This means that companies cannot merely rely upon having a director resident in the United Kingdom in order to be eligible. For existing VAT groups that do not comply with these territorial limitations it has been stated that they will have until 1 January 2000 to reorganise their businesses before the Commissioners of Customs & Excise remove them from the VAT group.

Arguably, the imposition of the time limit of 1 January 2000 to meet the territorial limitations does not give much time in practice to achieve the legal requirements needed to effect the change. This means that much immediate work will be required by the companies affected if they wish to remain in the VAT group.

5. The appeals legislation will be extended in section 83(k) of the Value Added Tax Act 1994 to include the refusal of an application for VAT group registration, the removal of a company on ineligibility grounds, or the removal on the grounds of protecting the revenue. This legislation increases the Commissioners' powers to remove companies from VAT group registrations, when they believe there is a need to protect the revenue from unacceptable loss. The legislation concerning VAT groups will be in addition to the powers of the Commissioners to demand security from a VAT registered entity when they consider that the revenue needs protection.

For further information please contact Beverley Tanner, e-mail: Click Contact Link , Trinity Court, 16 John Dalton Street, Manchester, M60 8HS, UK, Tel: + 44 161 830 5000

This article was first published in the Tax News - Special Finance Bill Edition issue of Hammond Suddards Tax News updates

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.