6 Value added taxation
| (30750) 11734/09 COM(09) 325
| Commission Communication on the VAT group option provided for in Article 11 of Council Directive 2006/112/EC on the common system of value added tax
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| Legal base | — |
| Document originated | 2 July 2009
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| Deposited in Parliament | 6 July 2009
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| Department | HM Treasury |
| Basis of consideration | EM of 20 July 2009
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
6.1 Under the VAT Directive, Council Directive 2006/112/EC, a
Member State may regard two or more persons established in that
Member State who, while legally independent, are closely bound
to one another by financial, economic and organizational links,
as a single taxable person for VAT purposes, that is, a "VAT
group". The main advantages are that a VAT group only has
to submit a single VAT return and transactions between members
in a VAT group are disregarded for VAT purposes. The provision
in the Directive about the option for Member States to introduce
VAT grouping schemes into their national legislation is brief,
which leaves it up to Member States to set the detailed rules
on the implementation of the VAT grouping option.
The document
6.2 The Commission considers that Member States differ widely
in the way they implement this provision and that a more uniform
approach is necessary. So in this Communication the Commission
aims to explain its view on how the provision should be translated
into practical arrangements whilst respecting the basic principles
of the VAT system. The Communication sets out a number of guidelines
for Member States to consider when introducing VAT grouping schemes
or when amending such schemes. The Commission discusses a range
of issues under the following headings:
- need for prior consultation of the VAT Committee,[19]
including the need for timely consultation before publication
of national rules;
- the main purpose of the VAT grouping option;
- who can form a VAT group, covering the notion
of person only applying to a taxable person for VAT purposes,
the notion of established in a Member State meaning all, but no
more than, fixed establishments in the territory of the Member
State, all activities of a member of a group being covered and
no person being a member of another group, all three links —
financial, economic and organisational — existing within
a group and a VAT grouping scheme covering all business sectors;
- the rights and obligations of a VAT group, covering
obligations resting with the group, rather than its members, treatment
of supplies to or from third parties, intra-group supplies and
formation and dissolution of groups; and
- the right of deduction of a VAT group, covering
the rules on the right applicable to a VAT group, the impact of
a VAT group on the right and the need for anti-avoidance measures.
6.3 The Commission says that, in the light of reactions
to the Communication, it will reflect on whether and when further
action would be appropriate. Such action could consist of proposing
amendments to the VAT Directive provisions on VAT groups. But
it could also be by "contributing to a more uniform and fiscally
neutral application of the current rules by other means"
— which is taken to mean by taking infraction proceedings
against Member States where the Commission disagrees with their
implementation of Community law.
The Government's view
6.4 The Financial Secretary to the Treasury (Mr Stephen
Timms) tells us that the Government's treatment of VAT grouping
is consistent with most of the points identified by the Commission's
Communication. He says that there are, however, two areas that
require further clarification. Noting first that the Commission
believes that only "taxable persons", broadly speaking
bodies that are actively engaged in economic activities, are entitled
to inclusion in a VAT group, which implies that the UK's rules
are too wide, in that they allow the inclusion of bodies that
do not fall within this definition, he comments that:
- the Commission is aware of
the Government's policy which allows non taxable persons, for
example, holding companies, into a VAT group;
- the Commission's view would, if put into practice,
represent an increase in burdens on business — in the Government's
view to no purpose; and
- it would require, for instance, that dormant
companies, some holding companies and pension fund trustees be
excluded from VAT groups, which could lead to an increase in administrative
costs and a loss of some recoverable tax.
6.5 The Minister then turns to a matter relating
to the treatment of cross border transactions between a head office
and a branch. Noting the Commission's view that, when a taxable
person joins a VAT group, any services it subsequently supplies
to its fixed establishment abroad should be considered as transactions
between two separate taxable persons and that VAT would be due
upon cross border transactions between them, he comments that:
- Government policy, supported
by Community case law, is to ignore transactions between establishments
of the same legal entity, regardless of whether that entity is
in a VAT group;
- the concept of a head office and a branch is
commonly used within the finance sector, where companies are often
restricted in the amount of VAT on their costs that they can recover
owing to the exempt nature of their supplies; and
- if these intra-head office/branch transactions
were subject to VAT, as the Commission envisages, the recipient
would suffer irrecoverable VAT — in the UK such transactions
are disregarded and no financial loss in respect of VAT is suffered.
Conclusion
6.6 We are grateful to the Minister for outlining
the two areas of concern for the Government in this Communication.
However we are unclear as to the Government's intentions in this
regard. We assume that it does not intend to alter the present
UK rules on VAT groups. Rather it will await possible infraction
proceedings or Commission proposals for amending legislation.
We should be grateful for confirmation that this is the case —
meanwhile the document remains under scrutiny.
19 The VAT Directive provides for an advisory committee
on value added tax, comprised of representatives of the Member
States and the Commission, which also chairs the committee. Back
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