星空传媒

On 1 August 2004 new eligibility rules came into force for establishing and maintaining value-added tax groups. VAT group relief is essential to ensure supplies of goods or services between group organisations of central support functions, for instance IT or finance, do not carry an additional VAT charge. As most registered social landlords have a very poor ability to recover VAT paid, this could be a substantial additional cost to the receiving RSL.

The new rules are designed to prevent an abuse identified by HM Customs and Excise, wherein companies were run by, and for the benefit of, third-party suppliers in order to count within the same VAT group as their customers 鈥� and avoid VAT on most or all of the goods or services being supplied.

A bad example

For example, normally if a bank were installing a major new IT system it would be procured from an appropriate consultant or IT firm, and the firm would employ a substantial team of people to implement the project over a considerable period of time.

All of these costs would be treated as VAT-able supplies and included within relevant VAT invoices. But using the old VAT group rules, the transaction could be restructured so that a new company was established as a subsidiary of the bank. The new company would employ the project team directly and the main contract would be between the new company and the bank. The consultant or IT firm would manage the work undertaken by the new company and receive a management fee or dividend payment. This management fee would be VAT-able, but would relate only to the profit element of the deal, excluding the employee costs. The contract between the new company and the bank would not attract VAT because they would be VAT grouped.

A draft order of the eligibility rules was published in June that raised substantial concerns for not-for-profit and charitable organisations, because the economic relationships between charitable or other not-for-profit groups are very different to those in the commercial sector and this had not been recognised. Fortunately, lobbying ensured the final statutory instrument should still allow for most social landlord VAT groups to retain their eligibility. Nevertheless, RSLs should be aware of the new provisions and ensure that their own group structure complies.

The previous eligibility test for VAT groups required a parent to control its subsidiary using tests based on the Companies Act 1985 definitions for a parent and subsidiary relationship. This test remains in force for all VAT groups. The new provisions impose additional tests relating to consolidation of accounts and economic benefits.

RSLs in a group may rarely fail the new eligibility tests 鈥� but other members of an RSL joint venture structure will quite possibly be caught out

There are a number of exemptions from the additional tests, but where these do not apply the organisation will not be allowed to VAT group (or if it is already part of a VAT group, it will have to be removed from it) unless it consolidates accounts with the other members of the group; or a majority of the benefits arising from the company are paid to organisations outside the group or to people who are not employees or directors of the organisation. 鈥淏enefits鈥� includes all profits of the organisation (whether or not distributed); charges for managing the relevant business activity (including charges for providing staff to manage it); and any other charges paid by the organisation that exceed the market value of the goods or services purchased.

Charity escapes

Charity subsidiaries (whether registered or exempt) are expressly excluded from the need to comply with the new tests. Other exemptions apply where the subsidiary is a wholly owned one and is not managed directly or indirectly by a third party. Where the only members are employees or directors or the parent, then it will be treated as wholly owned. This means that a non-charitable RSL subsidiary which has a fully 鈥渃losed鈥� membership structure would be exempt from the tests. But if, as is commonly the case, one or more former board members retain their shares, then this exemption would not apply.

The tests must be applied whenever the subsidiary supplies goods or services to other members of the group that would otherwise have been subject to VAT, and where the supplies are not merely incidental to the subsidiary鈥檚 main business.

In our view RSLs within a group will rarely fail the new tests 鈥� though it remains a possibility in some circumstances. But it is quite possible that other members of RSL groups will be caught out, especially joint venture arrangements. Dependent upon the commercial arrangements between the parties it is possible that a joint venture arrangement that would have been eligible for VAT grouping under the old rules, will no longer be eligible. RSLs should review their groups and if there is any doubt restructure their arrangements.