HMRC is to consult on whether to make changes to UK VAT grouping following decisions of the Court of Justice of the European Union (CJEU)
The consultation follows on from the two significant CJEU decisions of in Larentia & Minerva and Marenave (C-108/14) and C-109/14) and Skandia America Corporation (C-7/13). Both cases were about eligibility for VAT grouping and the treatment of cross-border transactions.
The consultation will invite UK business views on whether and, if so, what UK legal changes are required following these cases and the international response. It also asks for views about the interaction between VAT grouping and cost sharing provisions.
The UK has always restricted VAT groups to ‘bodies corporate’, where a number of persons are united and consolidated together so as to be considered as one person in law, and there is a ‘control test’ to determine this.
In July 2015, the CJEU decision in Larentia & Minerva and Marenave (C- 108/14 and C-109/14) indicated 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. One reading of this judgement is that member states may have to extend VAT grouping to a wider range of entities that have close financial, economic and organisational links. HMRC is asking for views on the risks and opportunities for businesses if VAT grouping is widened to other entities, such as partnerships.
It is also seeking feedback on what the impact would be of moving away from the current eligibility test, and is asking for suggestions of what alternative tests could be employed that demonstrate both financial control, and economic and organisational links.
In the second CJEU case, Skandia America Corporation (C-7/13), the court found Sweden's establishment only VAT grouping was consistent with Article 11 of the Principal VAT Directive (PVD), and resulted in taxable supplies from the corporation's overseas head office to its Swedish branch in the VAT group.
Following the Skandia case, HMRC put steps in place to recognise separate taxable persons created by establishment only VAT groups in other member states, to address the risk of double and non-taxation.
The consultation asks for views on how these changes have impacted business, both financially and operationally.
Ahead of two cases which have been referred to the CJEU regarding the VAT cost sharing exemption (CSE), HMRC is also asking whether businesses have any views on the interaction between VAT grouping and CSE, and in particular, the impact on the CSE of widening eligibility for grouping.
The consultation closes on 27 February 2017.
