Introduction to Making Tax Digital compliance for VAT Group

Introduction of Making Tax Digital compliance for VAT Group

HMRC’s initiative of Making Tax Digital (MTD), with the purpose to move towards digital transformation has left businesses shocked as this seems to be a little complex to comply with, in the beginning. It’s over six months since this announcement and most businesses are now well versed and comfortable with the legislative initiative.  Most of them are complying with the regulation while some are facing issues in adopting the new technology, digitization, and automation compared to their traditional approach of bookkeeping. Are you among those businesses that feel are having a discomfort in complying with the MTD compliance? Then Cygnet’s R7VAT MTD team will make this easy for you.

There was a deferral arrangement announced by HMRC to comply with the Making Tax Digital requirements until 01st October 2019. As per the HMRC announcement, there are various categories that need to be considered as deferral group for this purpose like, not for profit organizations that are not set up as companies, Trusts, Overseas traders, etc. One of the major categories who is affected by this deferral arrangement is the VAT group and division.

VAT group looks like having a coverage of complex transactions and procedural aspects. Yes, in fact, it is a set of long-drawn-out rules having complexity to deal with in practical life but will provide numerous amounts of repose to many of the organizations. Just like a coin, it also has two sides involving the pros and cons of the same. This article is not a full-fledged guide or advisory but tries to provide concise glimpse of what commentary it includes having VAT grouping

What is the VAT group and division and who can create a group?

  • VAT grouping is a facilitation measure by which two or more bodies corporate can be treated as a single taxable person for VAT purposes. ‘Bodies corporate’ includes companies of all types and limited liability partnerships.
  • Here, a single taxable person meaning by there is a “Single VAT Registration” under UK law.
  • There are detailed guidelines on who can be a part of the VAT group, which consists of another long-driven article.
  • In general, as per section 43A of VAT Act 1994,

Bodies corporate can form a VAT group if:

  1. Each is established or has a fixed establishment in the UK
  2. They are under common control
  3. They satisfy the conditions set out in Section 3 of VAT notice 700/2 by HMRC (related to ‘specified bodies’)

‘Control’ is hereby taking its special meaning based on the definition of holding and a subsidiary company in section 1159 of and Schedule 6 to the Companies Act 2006.

  • Unlike VAT grouping, VAT divisional registration is a facility provided by HMRC through which a corporate body that carries on its business through several self-accounting units to register each of those units or divisions separately for VAT.

Consequences of forming VAT Group

Here we won’t be elaborating on any pros or cons of this scheme. Though some businesses may feel the pros to be as cons for other groups of businesses. Here’s a glimpse of the consequences related to the VAT group.

  1. Unlike individual registration for different businesses, in this scenario, all the businesses forming a VAT group may require appointing a company as a ‘representative member’ of the VAT group. A single VAT return will require to be filed per return period for the VAT group, which will be in the name of a representative member of the group.
  2. Since the representative member is responsible for completing and rendering the single VAT return on behalf of the group, it needs all the necessary information and details in order to combine the respective data from all the member companies into VAT return as per statutory requirements. Here obtaining all relevant data to complete one return may take time thus, possibly you would be missing the VAT filing deadlines.
  3. There is a possibility of overlooking or missing the intra-group transactions when one needs to handle large number set of transactions for various group companies.  Here we may feel the requirement of transformation from a traditional paper-based approach to digitalized automation of record-keeping, which might require less amount of human intervention to identify and nullify the intra-group transactions and try to populate the correct VAT return with due compliance to the statutory guidelines. The digitalized automated tools may also keep a track of return filling deadlines along with the missing data let the user file a properly complied return on time and thus by one can avoid late filing penalties.
  4. Whilst all the responsibilities related to VAT compliance has been hosted to a representative member of the VAT group, all members of the group are jointly & individually liable for VAT debt.
  5. One needs to account for any tax due on supplies made by the group to third parties outside the group. This will particularly be helpful when centralized accounting adopted by any entity.
  6. As the group is being treated as a single taxable person, one does not normally account for VAT on goods or services supplied between group members.
  7. When the UK VAT group acquires certain services through an overseas establishment of a member of the same group, a VAT charge (known as “Reverse-Charge” and sometimes known as Section 43(2A) charge) implications need to be assessed. If this is the case, then the VAT charge will be due overall of the intra-group supply.
  8. The limit for voluntary disclosures of errors on past returns applies to the group (rather than each company having its own limit)
  9. The cash accounting limit applies to the group (rather than each company having its own limit).
  10. Partial exemption de minimis limits applicable to the group as a whole and not to members individually.
  11. Through VAT group arrangement, one may improve partial exemption position and input tax recovery in a case where either taxable supplies are made to a partly exempt group company or exempt supplies are made between group entities.
  12. The payments on account (POA) limits apply to the group as a whole and not members individually.

Are you worried about the compilation of data and intra-group supplies?

  • The major crux for filling of single VAT return on behalf of the group lies in compiling all the member company’s data into a single bundle and identify various intra-group transactions to nullify their effect from compilation into final VAT return. As the majority of the intra-group transactions will be disregarded for the purpose of VAT except those where section 43(2A) charge applies.
  • This problem may get noticed and reported by adopting the well versed automation-based technology which minimizes the quantum of error occurred by human efforts and intervention in these huge amounts of complex transactions.

Are you facing problems in having a clear track on the operational status of an individual member company along with the operational status?

  • For managerial personnel, it is mandatory to review and keep track of operational status for each member of the organizations within the group and to ensure the operational smoothness of the group.
  • Using the VAT group scheme may demand many managerial persons to have round-the-clock watch over operational results for member organizations of the VAT group along with a bird’s eye view on the operational status for the group’s consolidated results as well.

Cygnet R7VAT has the best Making Tax Digital (MTD) team that has the expertise in solving your criticalities by taking care of your indirect tax compliance with the help of our R7VAT MTD tool allowing you to shift focus on the core functions of the business and crucial decisions for your group of companies. If you are looking for assistance you can write to us hello@r7vat.com.

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