Businesses with cross-border VAT groups – especially those relying on in-house services from overseas members – should review their structures urgently. What once looked like legitimate planning may now put your VAT group (or part of it) at risk of disassembly.
In November 2025, HMRC announced that it was reversing its ‘Skandia policy’ on overseas establishments of UK VAT grouped entities – learn more in our article here. In hindsight, HMRC appear to have swapped a fiddly technical rule for a blunt but effective discretionary policy. It came in under many radars as an update to VAT Notice 700/2, separate from Autumn Budget 2025.
It’s helpful to take a little step back before addressing the update to Notice 700/2.
An example: UK VAT groups work at entity level
UK VAT groups have always existed at the entity level.
Let’s say a UK VAT group of insurers, the Just In Case Group (JIC), needs to purchase software services. The insurers would prefer not to pay VAT on the software services because they are heavily restricted in how much VAT they can recover under partial exemption. Thankfully JIC have a US-established VAT group member (LLC).
LLC can’t just buy software services in the US and sell them to the Group VAT-free. HMRC are wise to the potential avoidance here and have enacted anti-avoidance provisions which apply a reverse charge to such bought-in services.
Traditionally, however, there’s nothing stopping the LLC supplying in-house services to other VAT group members VAT-free. If LLC has an IT team that develop bespoke software for the insurance group, this was considered one of the natural benefits of being a member of a UK VAT group – not a risk to revenue.
But times change. HMRC already have broad powers to disband VAT groups for the “protection of the revenue” and their policy in relation to cross-border VAT groups has changed.
Instead of broadening the reverse charge in section 43(2A) to in-house supplies, HMRC are now threatening to disband VAT groups where the main purpose of the VAT group (in HMRC’s view) is to avoid VAT on cross-border supplies.
How could this affect VAT groups?
It is yet to be seen whether HMRC will employ this power widely or keep it as a last resort. HMRC may will restrict their use of this power to cases where “supplies in the UK between the UK establishment and the other VAT group members are disproportionately small compared to the supplies between an overseas establishment and the other VAT group members.”
How BKL can help
Our VAT specialists have a detailed understanding of changing tax laws and applying these to businesses of all sizes and sectors. We can help you to look at your cross-border VAT grouping arrangements in detail to understand whether the VAT group may be at risk and recommend ways of reducing that risk.
To discuss whether your VAT group is affected, and to receive specialist guidance on VAT compliance for your organisation, get in touch with Allon Greenstein or Luigi Lungarella, or send us an enquiry.
