Retain whole establishment VAT groups, says ICAEW
1 December 2020: ICAEW has urged the government not to replace whole establishment VAT groups with establishment-only provisions and warned that compulsory VAT groups shouldn’t be introduced.
In its response to an HM Treasury call for evidence on VAT grouping, ICAEW’s Tax Faculty has outlined concerns over the impact of changing to establishment-only VAT groups and of introducing compulsory VAT groups.
Published as ICAEW Rep 107/20, the faculty argues that replacing whole establishment groups would result in the salaries of those working in overseas offices becoming liable to UK VAT under the reverse charge.
It concludes that the impact would be particularly sever for businesses with significant numbers of overseas staff supporting the UK members of the VAT group. It suggests that those operating in finance, insurance, charity and not-for-profit would be most impacted.
The Tax Faculty acknowledges that while the move could result in limited savings in administration costs by removing the burden of calculating s43(2A) reverse charge VAT, it concludes that such savings were likely to be “insignificant” in comparison to the financial cost incurred by a partially exempt organisation.
A better way to reduce the administrative burden on businesses would be to retain whole establishment groups and instead simplify the s43(2A) reverse charge, the faculty concludes. It also recommends the removal of the MTD for VAT digital linking requirements for transactions involving overseas branches.
On the potential introduction of compulsory VAT grouping, the faculty confirmed that such a move would impose joint and several liability on businesses that do not wish to accept them. For example, a charity would be forced to take on the liabilities of a trading subsidiary.
It also suggests that the administrative burden of the change could be significant for some organisations. The document states: “In large groups the consolidation of figures for a VAT return from numerous remote locations could be almost impossible to complete by the due date, particularly if the requirement to have digital linking of MTD for VAT is adopted.”
The faculty also warns that the introduction of compulsory VAT grouping could result in increased litigation as taxpayers struggle to understand whether a group is formed.