Many large business organisations have complex structures and even the most straightforward invariably contain a number of different companies.

Frequently these companies carry out business with one another and many take advantage of the VAT grouping provisions which up to now have been freely available in the UK.

The main advantage is that VAT need not be accounted for on transactions between group companies. To illustrate the point at its most basic level, one could take the case of a service company with an associated trading company and regular management charges from the first company to the second. By registering with Customs & Excise as a VAT group the need to charge VAT on inter-company charges would be avoided.

Unfortunately, in recent years some organisations have attempted to exploit the VAT grouping in order to gain greater VAT recovery than would otherwise be achieved. In response to this the Chancellor has recently announced a consultation exercise on the operation of VAT grouping. Businesses have three months from the date of the consultation document to make representations to customs.

This exercise can clearly be seen as an anti-tax avoidance measure as the intention appears to be to restrict VAT groupings to those companies which can achieve full VAT recovery. The cost to the many categories of business who are unable to achieve full VAT recovery including the financial, insurance and property sectors could be enormous. Inevitably this extra cost will ultimately filter down to customers. Equally hard hit would be the many holding companies which are a common feature of most business groupings and who at present can generally reclaim VAT within the existing VAT regulations.

All those likely to be affected are advised to obtain a copy of the document, with a view to making their views heard.

Terry Parkinson is a partner with Haines Watts chartered accountants

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