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Charities Prepare For Blow Following EC Decision On VAT Grouping

by Jason Gorringe,, London

26 November 2009

A new European Commission action could increase the tax bills of charities based in the eight remaining member states that allow ‘non-taxable’ companies the benefits of value-added tax group registration, according to tax and business advisors PKF.

The European Commission has this week formally requested that eight EU member states, including the UK, change their legislation in respect of VAT group registration. The action against the UK concerns its practice of allowing ‘non-taxable persons’, or companies that are dormant or do not make taxable supplies in the course of business, to join a VAT group. The Commission has said that these companies are not eligible to register for VAT as a member of a VAT group.

The proceedings are at an early stage, and the Commission may have to pursue its case in the European courts before any changes can be imposed.

However, Debbie Jennings, Director of VAT at PKF, commented that: “If the UK does decide to change the law in line with the Commission’s views, this would have an adverse VAT impact on many charities and not-for-profit organisations because they carry out significant non-business activities and business activities that are exempt from VAT.”

VAT group registration allows for the members of the group to make supplies of goods and services to each other without the need to charge VAT - they are effectively treated as a single company for VAT purposes.

The main benefit of the UK’s current rules is that organizations with no taxable business activities - and therefore no right to recover VAT on their costs - can form a VAT group with a connected company which does make taxable supplies.

This allows for a proportion of VAT incurred on overheads to be recovered. Also, once in the VAT group, charges made to the non taxable company by other group members are not subject to VAT.

Under EU law, exemption from VAT can be given for cost sharing arrangements entered into by independent groups of people whose activities are exempt or non-business. Despite protracted lobbying of HMRC and the Treasury by interested parties, this exemption has never been enacted into UK law.

“If the European Commission is successful in forcing the UK to change its VAT grouping rules, the cost sharing exemption could [be brought in to] soften the blow to a sector that is seeing increasing financial pressures,” Jennings suggested, concluding:

“The new threat to VAT grouping may well spur charities to intensify pressure on the government to introduce the cost sharing exemption in the UK.”

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