They may be a good idea for many brokers, but we examine the often unexpected obstacles in the HMRC application process.
When brokers supply VAT-exempt insurance-related services to UK insureds, HMRC normally restricts the recovery of input VAT incurred on their expenditure.
But if a broker is operating through a group of companies and makes intra-group charges for supplies of services that don’t qualify for VAT-exemption, the situation may be different. Examples include secondments of staff, supplies of software, use of office facilities, management services. In this case, the supplying broker may trigger a requirement to register for VAT and account to HMRC for standard rate output VAT on those intra-group charges – that VAT being partly or wholly irrecoverable from HMRC by the recipient company.
A single VAT group: yes or no?
In order to remove this manufactured internal VAT cost, many brokers apply to HMRC to register both the supplying company and the recipient company (and other group companies too) as a single VAT group. This means the supplying company doesn’t need to account to HMRC for VAT in respect of the intra-group charges.
But the downside of registering for VAT is that it obliges the broker to account to HMRC for output VAT on any other supplies made that may be VATable , like software licence fees charged to third parties. This also applies to certain services received from non-UK suppliers, such as software or advertising services, regardless of whether their value falls below the current UK VAT registration threshold of £90,000 pa.
So, it’s essential to weigh up likely future output VAT costs against future VAT savings arising from a VAT grouping before applying to HMRC to form a VAT group.
Getting the application right
In the past few years, we have seen both brokers and HMRC mess up VAT grouping applications. This seems to happen most often when adding one or more companies (including UK branches of non-UK companies) to an existing UK VAT group. From the brokers’ side, high turnovers of staff in the past few years have led to mistakes, such as:
- Internal miscommunications
- Lack of follow-up on what is seen as a ‘minor administrative task’, ie adding a newly purchased company to an existing VAT group
- A company to which VATable services are supplied not being made to a member of a VAT group because the broker failed to send the VAT grouping forms to HMRC (or didn’t keep the documentary evidence to prove it had done so).
These issues are costly because, firstly, output VAT is due to HMRC on the intra-group services supplied to the non VAT-grouped company. Secondly, HMRC doesn’t normally agree to backdate VAT groupings by more than 30 days.
As a result, brokers are liable to HMRC for significant amounts of VAT (plus interest and potentially also a ‘careless error’ penalty). Often these issues are identified during broker groups’ annual statutory audit or during the due diligence process relating to a transaction.
HMRC’s struggles
From HMRC’s side, its VAT group registration team has also suffered high staff turnover in recent years. This means many VAT application forms have been lost or not processed. These oversights are normally spotted when someone (such as the broker’s auditor) asks for the most up-to-date VAT registration certificate. Since it lists the current VAT group members, it is then clear that HMRC hasn’t yet recognised certain companies as members.
The next stage is often a frantic search for proof that the forms were sent to HMRC. But, as we’ve said, it’s not always possible to find the evidence – leaving brokers in a difficult position with a lack of proof of sending the forms and HMRC denying they’d ever received the forms.
A minefield of challenges
But there’s another hurdle. If HMRC refuses to backdate the addition of a company to a VAT group by more than 30 days, then it seems the broker can only challenge HMRC’s decision through a judicial review in the High Court. This would be expensive, time-consuming and have no guarantee of success.
And the complications do not stop there.
Immediately the broker finds out the recipient company isn’t a member of the VAT group, regulations require it to inform HMRC of the amount of output VAT it owes (split into VAT return periods) on the intra-group charges made to the recipient company to date.
If the broker fails to make this voluntary disclosure, HMRC may consider it has “deliberately” tried to bring about a “loss of VAT” (per Section 77 of the VAT Act). This would allow HMRC to assess for VAT (and interest) going back four years from the date the broker discovered the error.
On top of this, HMRC could also levy a higher ‘deliberate error’ penalty (which may be as much as 100% of the value of the VAT assessments).
Needless to say, none of the above are pleasant discussions to have with an auditor or or an adviser carrying out due diligence.
Getting help pays in the long run
Creating VAT groups and adding companies to them is often seen as a quick and easy administrative task that doesn’t merit the cost of a VAT adviser. But, in our view, the associated professional fees are worth it because the adviser can:
- ensure that the VAT grouping forms reach HMRC by the deadline
- prove that they reached HMRC
- chase HMRC until the updated VAT group certificate is received.
When the broker’s auditor carries out their annual work or when an acquirer’s adviser does their due diligence, the broker can then be confident there are no unknown significant VAT costs (plus interest and penalties) associated with their intra-group charges. And that means they can’t give rise to accounts disclosures and sale price reductions or sale delays.
So we’d recommend always getting professional support to prepare and file VAT group application forms to HMRC. The cost is minor compared to the significant financial burden that might arise. It’s much like taking out insurance.
For more information on VAT groups and the issues for brokers, please contact Mark Ellis and Irfaan Abdool Wabh.
