Restrictions of VAT Groups
H.M. Customs & Excise consultative document
Comments from the Association of Chartered Certified Accountants
We thank you for the opportunity to comment on your consultation document `Restriction of VAT Groups'.
Whilst we appreciate that the Government must explore all revenue raising avenues, we think the proposed measures are fundamentally flawed. Firstly, you have admitted that the estimated revenue yield of £400 million is at best an educated guess. Secondly, even without the inevitable restructuring which businesses will take to minimise any tax increase, the administrative burden caused by companies de-grouping would lead to a significant increase in costs. You are thus proposing a measure which you know will result in higher costs for businesses without knowing the extent of the revenue yield. We would respectively suggest this is not good policy.
You cannot also merely look at VAT in isolation. Any increase in the VAT yield will need to be considered against the loss of corporation tax which will arise when businesses' costs are increased, thus reducing the taxable profits.
If these proposals are enacted as you suggest, businesses will reorganise and take legitimate steps to avoid the increase in VAT. Group property companies will be disbanded and properties moved back to trading companies. Service companies will be reorganised in a similar fashion. The results will be that your perceived revenue yield will fall dramatically. It is understood that you have asked for positive examples and associated costings. We have spoken to our members in companies who will be affected. There is a reluctance to provide any firm information, not because it cannot be substantiated, but because there is a concern that any information could be used against the organisations concerned. We can, however, report that indications are that only 10% to 20% of your anticipated revenue yield will materialise. It is also likely that some firms will move all or part of their operations to places outside the UK with more favourable tax regimes. This will result not only in a loss of VAT, but also a loss in direct taxes, together with a consequential loss in employment.
The proposals will obviously lead to an increase in the number of VAT registrations which will lead to a cost for Customs & Excise. These additional registrations will need to be controlled, thereby taking away resources from other areas, with a potential loss in collection of revenue. The breaking-up of groups will also inevitably lead to some registrations falling below the large-payer threshold and thus will avoid having to make monthly VAT payments. This will either result in a cashflow disadvantage to yourselves or, alternatively, the threshold will have to be reduced bringing in other businesses. If this is the case these businesses will suffer.
If it is your desire to prevent tax avoidance it is felt that this can be achieved by targeted legislation rather than this global measure. Such legislation would stop abuse whilst not inconveniencing the vast majority of taxpayers who are not involved in such actions.
You state in paragraph 13 of your paper that the EU is currently looking at the grouping facility from a European perspective. It would, bearing in mind the thrust for harmonisation, therefore make sense not to change our current system until the Commission have decided upon a common course of action. It would not be good policy to change our system now and have to change it again in the near future to comply with new pan European rules.
In summary
The proposal is flawed and is seeking to penalise the vast majority over the actions of a minuscule number. A move to remove a partially exempt company from group treatment will affect almost all groups in the UK and is completely unnecessary. The current partial exemption provisions are already more than adequate to block any abuse.
We consider that the setting of a de minimis level for partially exempt activities is again a device which will increase the complexity of the tax. The matter is adequately dealt with at present by businesses and Customs & Excise agreeing a suitable partial exemption method.
The consequence of change to the system of grouping will mean extensive restructuring by groups in order to mitigate the artificial fragmentation of the tax structure for their business activity. There may even be a number of groups which amalgamate their activities together into one company in order to optimise cash-flow and reduce administration.
Quite clearly a change of the grouping rules will lead to a vast increase in the number of VAT returns that would have to be submitted as each group company may well need to submit its own return. This would be particularly onerous where there were a number of dormant companies in the group for perfectly valid commercial reasons.
We strongly urge Customs & Excise to take away our comments, together with those of other interested parties, and actually consider in detail the global tax effect for the Government of their proposals, as revenue gain is clearly the driving force behind the consultation. Then it should consider whether any net gain to the exchequer is worth the significant increase in the compliance burden to businesses.
We thank you again for the opportunity to comment and will be pleased to participate in any future consultation.