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VAT recovery under threat from European decree

Finance | Gareth Jones | 24 Nov 2009

Charities’ VAT recovery will be reduced if the European Commission succeeds in a demand that ‘non-taxable companies’ be excluded from joining VAT groups.

The Commission has formally asked the UK, as an EU member state, to change its legislation, as it says companies that do not make taxable supplies in the course of business should not be allowed to join VAT groups.

The proceedings are at an early stage and the Commission may have to pursue the case in the European Courts, but Debbie Jennings (pictured), director of VAT at PKF, said any change could have an adverse affect on many charities as they carry out significant non-business activities and business activities that are exempt from VAT.

“The main benefit of the UK’s current rules is that organisations 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.”

Cost-sharing exemption?

She added that 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, 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 soften the blow.

“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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Directory: PKF (UK) LLP
Who's Who: Debbie Jennings