Can you register for VAT advantages?

Trap for the unwary

Scenario. Good Causes Ltd is a registered charity and owns a trading subsidiary called Good Causes Trading Ltd. Neither company is registered for VAT because their main supplies are either outside the scope of or exempt from VAT. However, Good Causes Ltd incurs costs on behalf of Good Causes Trading Ltd, and wants to make a management charge of £10,000 per month for these services.

Trap. The problem with the above situation is that Good Causes Ltd will need to charge output tax on the management services once it has exceeded the VAT registration limit (£77,000 per annum with effect from April 1 2012) but Good Causes Trading Ltd will not be able to reclaim this VAT as input tax because it is not making any taxable supplies.

Charitable solution

The two companies could register for VAT as a group, which means that supplies of goods and services between group members is ignored as far as VAT is concerned.

However, some might challenge whether this is allowed because there is no taxable income being generated by either company outside of the VAT group. But this is not a problem - the important point is that Good Causes Ltd is making supplies that would require it to register for VAT in its own right - but these supplies escape a VAT charge because they are being made to another entity in the same VAT group.

The fact that Good Causes Trading Ltd does not make any taxable supplies is also not a problem - it can still be a member of the VAT group.

The result is that:

The group registration will submit nil VAT returns because there are no taxable supplies being made to third party customers. This means there is no scope to reclaim input tax on any costs incurred by either Good Causes Ltd or Good Causes Trading Ltd.

The positive point is that management charges can be made between the two companies without one charging output tax that the other cannot reclaim as input tax. This is a very satisfactory result.

Wider context

Recap. The main benefit of a group registration is that a supply of goods or services between group members avoids a VAT charge.

Tip 1. There are many situations when businesses are not VAT registered because they only make exempt supplies. It is worth reviewing your records (and don't forget inter-company accounts) to ensure that management charges are not being made to connected companies that could require you to register for VAT. If this is happening, the group registration should be seriously considered.

Tip 2. One important rule regarding group registration is that a group can be formed even if the only taxable supplies being made are between group members. This is a point that is often not appreciated.

Can you register for VAT advantages?

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