H.M. TREASURY Notes on Clauses

CLAUSE 13: VALUE ADDED TAX (GROUPS OF COMPANIES)

INTRODUCTION

1. This clause and Schedules 2 and 20 Part II (1) make a number of changes to the VAT grouping rules to allow grouping applications to take effect from the date that they are received by Customs; only allow companies to group if they are established or have a fixed establishment in the UK; provide powers to remove companies from groups on ineligibility or revenue protection grounds; and amend the appeal rules so that there is a right of appeal against removal of a company from a group. These changes take effect from Royal Assent but companies which are already grouped, but are not established or do not have a fixed establishment in the UK, will have until 1 January 2000 before they cease to be eligible for grouping.

2. These changes are intended to provide a fairer balance between business facilitation and revenue cost. They provide benefits for business, remove uncertainty arising from decisions of the VAT & Duties Tribunal, and enable Customs to treat equally those companies which are grouped and those which are refused grouping.

DETAILS OF THE CLAUSE AND SCHEDULES

3. Clause 13 gives effect to Schedule 2 which makes changes to the VAT group treatment provisions.

4. Schedule 2, paragraph (1) effects changes to section 43 of the Value Added Tax Act 1994 (groups of companies). It amends subsections 43(1) so that it refers to new sections 43A to 43C which replace subsections 43(3) to (8), which cease to have effect.

5. Paragraph (2) inserts new sections 43A to 43C.

6. Section 43A provides for a new eligibility criteria against which applications for grouping will be tested. This is largely the same as the previous legislation. However, companies now need to be 'established' or have a 'fixed establishment' in the UK. This change is necessary because a decision in the VAT & Duties Tribunal was that Customs' interpretation of the previous term, 'residence', was extra statutory. The change removes the uncertainty for business brought about by the Tribunal decision, and replaces tests which have their roots in company law with tests more consistent with VAT law. The new definitions will ensure that group members have an establishment of sufficient size with the permanent human and technical resources in the UK needed to undertake their business activities. For example, a registered office with resident directors may not necessarily be regarded for the purposes of this section as a fixed establishment.

7. Section 43B makes provisions about applications which are made to form and change the composition of a group. Applications will normally be approved from the date of receipt, but Customs will also be able to approve prospective and retrospective applications. Customs will be able to refuse an application at any time during the 90 days following receipt of the application. Applications can only be refused during this period where it is established that the eligibility criteria are not met or where there are grounds for refusing the application to protect the revenue. When an application is refused, it is to be treated as if it had never been granted. This replaces the requirement for businesses to give 90 days notice when making an application which was seen as an obstacle by business.

8. Section 43C enables Customs to remove companies from groups when it appears that the control criteria have ceased to be met (ie that the holding / subsidiary company relationship used to establish organisational, financial and economic links is no longer in place), as was previously the case. The change means that Customs will now be able to remove companies from groups when it appears that any of the eligibility criteria are no longer met, or when necessary for the protection of the revenue. In either circumstance, Customs will issue a notice specifying when a company is to be removed from a group. The date of removal of a company on ineligibility grounds will not be earlier than the date on which the company was not, or ceased to be eligible. However, Customs' will have the discretion to remove a company from a later date. The date for removal of a company on revenue protection grounds will not be earlier than the date on which the notice is given. This power enables Customs to treat equally companies which are refused grouping on ineligibility or revenue protection grounds, and companies already treated as members of groups which cease to be eligible or present the same revenue risk.

9. Paragraph (3) amends section 83(k) of the Value Added Tax Act 1994 (appeals) so that companies can appeal against the refusal of an application under the new rules. It also introduces a new right of appeal, so that companies can appeal against the issue of a notice to remove a company from a group on ineligibility or revenue protection grounds.

10. Paragraph (4) inserts new subsections (4A) to (4D) after section 84(4) of the Value Added Tax Act 1994 (appeals supplementary).

11. Subsection (4A) sets out that the jurisdiction of the tribunal, when considering appeals against the refusal of an application to form or vary a group for the protection of the revenue, shall be supervisory. It also sets out that the refusal shall have effect pending the determination of an appeal and that the refusal shall be taken not to have occurred if the appeal is allowed.

12. Subsection (4B) sets out that, when an appeal is made against the issue of a notice to remove a company from a group, the notice shall have effect pending the outcome of an appeal. If the appeal is allowed, the notice will be deemed to have never had effect.

13. Subsection (4C) clarifies that the tribunal shall have supervisory jurisdiction in respect of appeals against the issue of a notice to remove a company from a group for the protection of the revenue.

14. Subsection (4D) clarifies that the tribunal shall have supervisory jurisdiction for appeals relating to the date on which a company is removed from a group where it appears that the eligibility criteria are not or are no longer met.

15. Paragraph (5) amends Schedule 9A to the Value Added Tax Act 1994 to reflect the changes to section 43, so that the removal of a company from a group shall not be regarded as a 'genuine commercial purpose' for the purposes of that schedule.

16. Paragraph (6) provides for transitional arrangements. In particular it ensures that companies, which were treated as members of a group under the previous legislation, will continue to be treated as a group under the new legislation.

17. Where an application has been received before the new provisions take effect, the application shall be considered under the old provisions and, if approved, will be treated as if it had been approved under the new provisions.

18. A company which was a member of a group under the old provisions, which is no longer eligible under the new provisions because it is not established or does not have a fixed establishment in the UK, shall not be removed from a group before 1 January 2000.

19. It also provides that, where an application is received after the new provisions come into effect, but the application is being made under the old provisions, it shall be treated as if it were an application under the new provisions.

20. Schedule 20, Part II (1) provides for the repeal of section 43(3) to (8) of the Value Added Tax Act 1994 and section 25(3) and (4) of the Finance Act 1995, subject to the transitional provisions in paragraph 6 of Schedule 2.

BACKGROUND

21. VAT group treatment is a business facilitation measure, intended to reduce the administrative impact of the tax on associated companies. The grouped companies account for tax on a single return, and supplies between them are disregarded for VAT purposes. Businesses are normally able to choose which companies they group, provided that each company meets the eligibility requirements.

22. These measures will raise an additional £5 million during 1999/2000 and £10 million in subsequent years. £40 million of potential loss through tax avoidance will also be protected.