No: CE 10 28 November 1995 BUDGET 1995 : VAT GROUP REGISTRATION RULES: PREVENTION OF ABUSE AND CONSULTATION ON GROUPING RULES The Chancellor has announced that from 29 November 1995 the law on VAT group registration will be changed so as to increase the powers available to Customs and Excise to counter VAT avoidance involving the transfer of companies or assets into or out of groups. VAT group registration is an important business facilitation measure, but it has been used as a basis for avoidance schemes which, if unchecked, have the potential for causing a significant loss to the Exchequer. The changes are designed to preserve the benefits of group registration but to check its abuse. The measure will become law from Royal Assent but will have effect from midnight tonight. The proposals arise from the first phase of a comprehensive review by Customs of the grouping provisions. The Chancellor also announced the commencement of the more general second phase which, in consultation with the trade, will explore whether the grouping facility can be improved or extended. NOTES FOR EDITORS 1. Grouping under section 43 of the VAT Act 1994 eases the burden of accounting for VAT for closely related enterprises by ignoring supplies of goods and services between group members for tax purposes and using one member of the group (the representative member) to account for VAT on all supplies to and from companies outside the group. This also simplifies the collection of the tax for Customs. The saving to businesses from the normal operation of the grouping rules was recently estimated as 400 million Pounds in VAT per annum. 2. Grouping is permitted by the Sixth VAT Directive, but there is no obligation to allow it and in practice, apart from the United Kingdom, only Denmark, Germany, Ireland and the Netherlands have introduced it. All these Member States have found it necessary to employ measures for countering abuse of the grouping rules. 3. In the United Kingdom, provision for grouping has been available since the introduction of VAT in 1973. It has long been recognised that the selective use of grouping (particularly movement to and from a group at critical times) can provide taxation advantages beyond those intended, but abuse has only become a serious problem in recent years. The present measures seek to clamp down on systematic avoidance which goes beyond normal tax planning but, at the same time, preserve grouping as a facilitation measure for legitimate business purposes. 4. Avoidance schemes seek to recover VAT (as input tax) in circumstances where it would not normally be recoverable because it has been incurred in relation to making supplies which are exempt (e.g. banking, insurance, share dealing etc.), or where recovery of the VAT is normally blocked. Such schemes typically rely on full input tax deduction being taken by a separately registered company on supplies of goods and services it makes to a VAT registered group. Strategically timed changes to the composition of the group or its trading activities (e.g. by the transfer of assets in to or out of the group) ensure that the bulk of the payment for the supplies escapes VAT. 5. A Tribunal case concerning the recovery of blocked VAT on business cars led to action being taken to block this particular avoidance device by imposing an automatic VAT charge on the departure of a company from a group. In a reply to a Parliamentary Question from Matthew Banks MP on 28 February 1995 the Paymaster General announced that, apart from the action needed to deal with the particular scheme which had been upheld by the VAT tribunal, Customs would be undertaking a review of VAT grouping. The proposals now announced result from the first phase of the review, which has concentrated on the VAT avoidance issue. 6. The new powers will enable Customs to direct, exceptionally, that supplies that have been made between members of a VAT group will be subject to the tax (these are normally disregarded for VAT). Customs will also be able to direct retrospectively that an associated company shall be treated as if it had been part of a VAT group from a particular date or that a member of a group shall be removed from that group from a particular date. Customs will only be able to exercise these powers in circumstances where changes to the composition of a group or its trading activities and the timing of payments between participating companies would otherwise result in tax not being charged on the full value of a supply. However, even if the conditions of this basic test are met, arrangements which are undertaken for genuine commercial reasons and not for the purpose of VAT avoidance have specifically been excluded from the scope of the new powers. The right to appeal to an independent VAT tribunal has been extended accordingly. Effectively, the new powers will be limited to use in cases of deliberate VAT avoidance. 7. The new powers will apply, after the Finance Bill receives Royal Assent, to avoidance schemes where the movement of a company, or transfer of assets, in or out of a group took place after midnight on 28 November 1995. Directions under these provisions will be subject to a 6 year time limit. Any assessment to tax made in reliance on such a direction must also be issued within a year of the direction. 8. These new measures complement existing Customs' powers in relation to group treatment. The right to refuse applications for group treatment or for a change of a group's representative member have been available from the inception of VAT in 1973; more recently, the power to refuse departure from a group was added by section 25 of the 1995 Finance Act. This power is to be retained, but (from Royal Assent) the more specific measure in what is now section 43(1A) of the VAT Act 1994, which imposed an automatic VAT charge on the departure of a company from a group, will be repealed. 9. Because of the sensitive nature of the subject, Customs did not consult trade interests prior to the Chancellor's announcement but will expose the draft legislation for comment in advance of publication of the Finance Bill. As the powers are by law restricted to countering VAT avoidance within the comparatively small group sector, the bulk of VAT registered traders and almost all small businesses will be wholly unaffected. Companies currently eligible for group treatment will not be required to maintain records other than those generally required for VAT. Overall, no additional cost to the trade results from these measures. 10. The second phase of the review of VAT grouping will look at other aspects of group registration and will be undertaken with full trade consultation. Copies of the draft clause which is to implement this change, with relevant explanatory information, and the consultation paper on the second phase of the review of VAT grouping may be obtained from: H M Customs and Excise, VAT Policy Directorate Branch VAT6B 4SW, Queens Dock Liverpool, Merseyside, L74 4AB. Fax 0151 703 8614 11. A Compliance Summary (reference CS 2/95) is available, copies of which can be obtained from David Lonsdale, CDG, 8th floor C, HM Customs and Excise, New King's Beam House, 22 Upper Ground, London SE1 9PJ (Tel No: 0171-865-5570). 12. Details of this measure for traders are available in Budget notice BN 129/95. ISSUED BY: HM CUSTOMS AND EXCISE, PRESS AND INFORMATION OFFICE, NEW KING'S BEAM HOUSE, 22 UPPER GROUND, LONDON, SE1 9PJ TELEPHONE: 0171 865 5468/5470/5471 FAX: 0171 865 5625 1