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Does a parent and subsidiary have tobe a VAT group

Is it compulsory that a parent and subsidiary register as a vat group?

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Company A is vat registered and complete returns accordingley.  Company B is wholly owned by Company A.  Company B had vatable business income of £50k per annum but is not themselves vat registered - they choose to not register as the £50k is charged to the pulic so and they don't want to have to add 20% on to the price.  There are no inter group charges betweeen the two.

Am I correct that company A & B  do NOT have to form a vat group?

If so - what would stop Company A from palming off each sales activity into new subsidiaries to prevent having to add 20% on to their sales? i.e constantly remaining beneath the compulsory registration threshold by creating more and more subsidiaries. (to note 80% of costs are salaries so very little input tax to reclaim)

I had in mind that they would have to group together for the very reason of avoiding my second point but my reading suggests this is not the case.





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By thevaliant
04th Mar 2019 14:46

They don't have to be in a VAT group.

There *may* be some antiavoidance rules about forming multiple subsidiaries to avoid VAT registration, but personally the best block to doing this is that fact you'll end up with A MILLION companies to prepare accounts for (okay, I jest, but even a £8m turnover business (ie, SMALL) is going to need 100 companies to keep them all below the VAT threshold).

That's 100 accounting charges, and £1,300 a year alone in confirmation statements.

Thanks (1)
Replying to thevaliant:
By Wilson Philips
04th Mar 2019 15:09

I wouldn't say that there *may* be some anti-avoidance rules to catch this scenario. There *are* such rules. Where there is an element of doubt is whether HMRC could successfully apply them, which would depend on the precise facts and circumstances.

Thanks (2)
By Vile Nortin Naipaan
04th Mar 2019 16:02

When you say that there are no ontra-group charges, are you saying that there will not be any intra-group supplies?

Will the staff be employed only by the companies for which they will perform duties?

I'll bet the intention is to just have one company employing all the staff, but then have those staff working fluidly between the companies.

I can confirm that there are provisions that will deem there to be a supply and fixing the amount of the consideration for that supply.

Thanks (1)
By lionofludesch
04th Mar 2019 18:40

I vote no.

Thanks (0)
By hairyfingers
05th Mar 2019 07:59

Thanks all.

yeah so a bit more on the specifics. The parent is a charity the subsidiary is not.

There are genuinely no inter group supplies. The subsidiary has 3 part time staff and they lease their own building, certainly there are no invoices between the two. Aside from the £50k business income they also have non-business income of grants

I suppose the the counter argument to requiring 100 companies for 8 million turnover is, OK the accounting fees are large but the vat saving is larger. So although this is an argument it isn't the killer, as ultimately they *could* choose to have 100 companies (to note the subsidiary total turnover is no where near 8 million.

My argument to them is that even though the parent is a charity and vat registered, as they opted to tax a new build and now charge vat on the lease income, they could legitimately carry out all of the activity of the subsidiary as primary purpose trading (the sub activity is very similar to the main objectives just that they charge for it) so therefore what is the benefit of having a sub (charity 3 million income sub £100k so limited risk of having in one pot)

There argument back to me was they would have to charge vat on the £50k so why bother merging. I don't really want to say to them hey this is fine and by the way the you can just keep setting up new companies - but of course if it is fine then so be it.

My best shot then is the anti avoidance measures, others have mentioned. Could you point in in the right direction of these?

many thanks

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Replying to hairyfingers:
By spidersong
05th Mar 2019 09:01

Schedule 1, 1A (2) and 2 (2) are the main part of the law, and the HMRC Guidance is here (although I've not looked through to see how much is 'redacted to protect the public purse')

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Replying to spidersong:
By hairyfingers
06th Mar 2019 00:38

perfect thanks. I shall take a look

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By Michael C Feltham
06th Mar 2019 11:34

All depends whether or not HMRC deem what is called a "Connected Activity".

Many smaller business would dearly love to split their business activity in two or more! particularly so where, for example, a core part of their is supplies to non-VAT registered traders and more critically, the public. Obviously, a heating engineer could depress its revenue by having a subsidiary business to supply all major parts and components, such as new boilers etc. And then reduce their charge out rate on labour by 20%, overnight!

Not allowed; a Connected Activity.

Thanks (1)
By Echo761
06th Mar 2019 11:39

Lots to think about here. Disaggregation. Non primary purpose income and the trading subsidiary. Gift aid of profits. Partial exemption and non business. There are many reasons why you would want to form a vat group. ....

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