What are the VAT implications of having a trading subsidiary?

As the trading company is a separate legal entity it must register for VAT if its taxable supplies exceed the VAT registration threshold. Any charges from the charity to the trading company for use of the charity’s resources (i.e. a management charge) are likely to be within the scope of VAT and may cause the charity to have to register for VAT. It would then be possible to form a VAT group. This would have three main advantages:

  • It can simplify VAT administration – there is only one VAT return to complete each quarter
  • The charity and trading company do not have to charge VAT on supplies to each other (including the management charge)
  • The level of taxable activity in the trading company may help improve the charity’s residual VAT recovery rate

However, a potential problem is that in a VAT group each member becomes jointly and severally liable for the VAT debts of the others. This risk needs to be considered and weighed against the benefits of the VAT group (e.g. improved VAT recovery).

Want to discuss further?

Helen Elliott

Partner

Ross Palmer

Senior Tax Manager

Gillian McKay

Senior Tax Manager

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