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Can spouses’ companies form a VAT group?

Q. My wife and I are directors of two limited companies. I own 100% of the shares in Company 1 and we jointly own 50% each in Company 2. As the latter company is not VAT registered (it only makes exempt sales) we would like to form a VAT group so that VAT is not charged on inter-company recharges for shared expenses. The first company is registered for VAT and only has taxable sales. Is this possible?

A. You can form a VAT group in most cases if all of the proposed members are under the control of one of the members, or if a person or group of persons outside of the group controls all of them. In this situation, no single person controls Company 2, so it is not possible to form a VAT group per VAT Notice 700/9 (see The next step ).

Tip. If 1% or more of the shares in Company 2 were transferred to the husband, then the control condition would be met because he will be the majority shareholder in both companies.

Trap. The VAT group would be partially exempt with an input tax restriction on costs incurred by the group that partly or wholly relate to the exempt supplies made by Company 2.

For a link to VAT Notice 700/9, visit http://tipsandadvice-vat.co.uk/download (VA 10.06.08).