March 7, 2026
By Merranti

VAT Groups in 2026: Strategic Planning, Risks and Practical Considerations

VAT grouping has long been a valuable planning tool for corporate structures. However, in the current environment of tighter compliance, evolving HMRC practice, and increasing commercial complexity, forming (or reviewing) a VAT group is no longer a simple administrative decision.

Recent HMRC updates to contact procedures and guidance emphasise the importance of structured compliance and proper communication , while the detailed consequences of VAT grouping remain highly fact-specific .

In this article, we explore:

How VAT grouping works
The key advantages
The principal risks
Partial exemption implications
Administrative considerations
When grouping may (and may not) be appropriate

What Is a VAT Group?

Under UK VAT legislation (VATA 1994, s43), eligible entities under common control can apply to register as a single VAT group. The group is treated as one taxable person.

The core structural consequences are:

One representative member is appointed
One VAT registration number is issued
One VAT return is submitted
All supplies to and from third parties are treated as made by the representative member
Intra-group supplies are disregarded for VAT purposes
All members are jointly and severally liable for VAT debts

In simple terms: the group becomes one VAT entity for external purposes, but retains separate legal identities for corporate and commercial purposes.

The Main Advantages of VAT Grouping

1. No VAT on Intra-Group Supplies

One of the most significant benefits is that supplies between group members are ignored for VAT purposes .

This is particularly valuable where:

One entity provides management services to another
Shared services companies are used (HR, finance, IT)
Finance or property entities charge other group members
One entity is partly exempt

Without grouping, VAT may be charged on intra-group recharges. If the receiving entity is partially exempt, irrecoverable VAT becomes a real cost. Grouping removes this friction.

For many businesses, this is the primary driver for grouping.

2. Centralised VAT Administration

Only one VAT return is required .

For businesses with:

Multiple subsidiaries
Centralised finance functions
Shared accounting systems

this can simplify compliance and reduce duplication.

However, this benefit only exists where internal systems are well-managed. Poor coordination can create risk (see below).

3. Potential Partial Exemption Benefits

Where intra-group exempt supplies would otherwise restrict input tax recovery, grouping can improve recoverability .

For example:

A finance company making exempt loans to trading subsidiaries
A property company charging exempt rent to another group member

If these transactions are ignored under VAT grouping, the residual recovery position of the group may improve.

However, this is highly fact-specific and can sometimes produce the opposite outcome.

The Principal Disadvantages

VAT grouping is not risk-free. In fact, in some structures it can materially increase exposure.

1. Joint and Several Liability

Every group member is jointly and severally liable for the VAT debts of the representative member .

This means:

If one company fails, the others remain liable
If the representative member makes an error, all members are exposed
Buyers of subsidiaries may inherit historical VAT exposure

This is often overlooked in acquisition or disposal planning.

Where a subsidiary is being sold, VAT grouping can complicate due diligence and warranties.

2. Partial Exemption De Minimis Limits Apply to the Whole Group

The partial exemption de minimis test applies to the group as a whole, not per company .

This can:

Push the group above the de minimis threshold
Restrict recovery for otherwise fully taxable entities
Create unexpected input tax disallowances

Where one entity is heavily exempt, it may contaminate the recovery profile of the entire group.

3. Cash Accounting and Threshold Impacts

Various thresholds apply to the group as a single entity, including:

Cash accounting eligibility
Payments on account thresholds
Error correction limits

Grouping can inadvertently remove eligibility for favourable schemes.

4. Loss of Individual VAT Numbers

Existing VAT numbers are cancelled and replaced with a group number .

This can:

Affect contractual documentation
Require supplier updates
Impact international trading documentation

Operational disruption should not be underestimated.

Time of Supply: A Subtle but Important Risk

The Supreme Court decision in Prudential Assurance Company Ltd v HMRC [2025] UKSC 34 confirmed that time of supply rules determine whether a supply is intra-group (and therefore disregarded) .

This matters when:

Entities join or leave a VAT group
Supplies span a grouping date
There are long-term contracts

Failure to analyse time of supply properly can lead to unexpected VAT liabilities.

VAT Registration Threshold Rumours – Why It Matters for Groups

There has been speculation about changes to the VAT registration threshold (currently £90,000), potentially effective from 1 April 2026 .

Although unconfirmed, changes could:

Force smaller subsidiaries to register
Affect group eligibility
Alter supplier cost structures

Where a threshold is reduced significantly, prepayments before a supplier registers may create earlier tax points . This planning opportunity carries commercial risk but may be relevant in certain sectors.

Groups should monitor announcements carefully.

Contacting HMRC – Getting It Right

HMRC continues to prioritise online contact, with updated contact lists published to direct queries appropriately .

For VAT:

General helpline: 0300 200 3700
Payment problems: 0300 200 3831

Businesses should:

Ensure VAT records are current
Have representative member details accessible
Prepare for security verification

Where written rulings are required (for example, zero-rating disputes), HMRC will only provide one if guidance does not already answer the question .

This reinforces the importance of technical review before seeking clearance.

When VAT Grouping Works Well

VAT grouping is generally most beneficial where:

There is a strong trading group under common control
Intra-group recharges are significant
Partial exemption planning supports grouping
The group is financially stable
Administration is centralised and robust

It is particularly useful for:

Professional service groups
Property and trading combinations
Groups with shared service companies
Owner-managed business structures

When Caution Is Required

VAT grouping may be inappropriate where:

There is financial instability within the group
A subsidiary is likely to be sold
Partial exemption exposure is high
Different accounting systems create compliance risk
Cash accounting eligibility would be lost

In these cases, divisional registration or standalone registration may be more appropriate.

Practical Steps Before Forming a VAT Group

Before proceeding, we recommend:

Modelling the partial exemption position pre- and post-grouping
Reviewing intra-group transaction values
Assessing joint liability exposure
Reviewing cash accounting eligibility
Considering future disposals
Confirming control tests are met
Reviewing time-of-supply risks
Updating contracts and customer communications

Grouping should be a strategic decision — not simply an administrative one.

Final Thoughts

VAT grouping remains a powerful tool in the right circumstances. The ability to disregard intra-group supplies and centralise VAT compliance can deliver real savings.

However, joint and several liability , partial exemption complexity, and compliance risks mean it must be carefully evaluated.

With possible VAT registration changes on the horizon and ongoing HMRC scrutiny, 2026 is a sensible time to review whether your current VAT structure remains fit for purpose.

If you would like a VAT group review or modelling exercise, Merranti Accounting can help you assess whether grouping supports your commercial objectives while managing risk appropriately.