HM Customs and Excise are reviewing the VAT grouping regime and are contemplating restructuring the availability of VAT grouping to fully taxable companies. A review of the implications for property companies
Richard Croker issues a warning
Are your property companies in a VAT group? Then beware. HM Customs & Excise are reviewing the VAT grouping regime and are contemplating restructuring the availability of VAT grouping to fully taxable companies. We ask if this threat is serious and, if so, what are its implications?
Are Customs serious?
Some commentators cynically suggest Customs have decided in advance to restrict VAT grouping - we are not so convinced. If it makes money, we suspect ministers will welcome the suggestions, but it if does not, we do not expect change until such time as the
UK Government is forced to act by the European Commission. This is unlikely in the short term although not all member states allow grouping and those regimes which do, tend to be more restrictive than the UK. There is ample evidence that this measure will not raise revenue: on that basis, Customs are unlikely to pursue it, particularly if it is opposed (as we believe it should be) by taxpayers.
What are the implications of the change?
If the proposals go through, only companies which are fully taxable will be entitled to form a VAT group. Those property owning companies which let unelected property will have to be separately registered or become unregistered. This alone could lead to a proliferation of separate registrations of property companies which will require extra control resources from Customs - more partial exemption methods will need to be agreed.
The recovery of VAT on overheads may be restricted by such changes. However, we contemplate that VAT planning in the form of intra-company management charges from partially exempt companies to the fully taxable group will become common. The exempt companies will thus employ management staff to boost their taxable turnover. If accounting periods can be appropriately staggered, an effective cashflow advantage could be obtained at the expense of Customs which would not have been contemplated (or necessary) under the old grouping regime.
"Degrouping" may have unexpected benefits : the payment in instalments regime may cease to apply so that cashflow is improved eg where companies cease to be part of a group and must register separately.
Why is the proposal wrong?
It has been accepted VAT practice since 1973 for grouping to occur - it has always been seen as a relieving measure which benefits traders and Customs alike because it cuts down on administration requirements. That this should now be considered to be questionable - and that it should be accused of losing the Exchequer £400m per annum as Customs allege - is somewhat surprising. We doubt this figure and we doubt whether Customs will make real savings if they abolish the existing rules. In the property sector one result of abolition may be more elections to waive exemption over currently exempt properties which will not be good news for the VAT exempt occupier. We believe Customs should rely on (and extend if necessary) their existing anti-avoidance rules to limit the abuse of the VAT grouping system, but leave most VAT groups well alone. If it ain't broke, don't fix it!
