VAT Groups — What They Are and When to Use Them

The Accounted Tax Team·3 March 2026·8 min read

If you run multiple companies that trade with each other, you might be creating unnecessary VAT paperwork — and potentially unnecessary VAT costs. VAT grouping lets related businesses register as a single entity for VAT purposes, so transactions between group members are disregarded for VAT. No invoicing, no VAT charges, no reclaiming. The supplies simply don't exist from a VAT perspective.

It's a powerful tool for the right businesses, but it comes with responsibilities and risks that you need to understand before jumping in. Let's look at how VAT groups work, when they make sense, and when they don't.

What Is a VAT Group?

A VAT group is two or more legal entities that register together under a single VAT registration number. For VAT purposes, the group is treated as one taxable person. All supplies between group members are ignored — only supplies made to or received from outside the group are subject to VAT.

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One company within the group is nominated as the representative member. This company is responsible for:

Submitting the group's VAT return
Paying any VAT owed (or receiving any VAT refund)
Keeping the VAT records for the group
Communicating with HMRC on VAT matters

All other companies in the group are jointly and severally liable for the group's VAT debts. This means if the representative member can't pay, HMRC can pursue any other group member for the full amount. This joint liability is one of the key risks of VAT grouping.

Who Can Form a VAT Group?

To be eligible for VAT group registration, the entities must be:

Bodies Corporate

Only bodies corporate can be members of a VAT group. This includes:

Limited companies (Ltd)
Public limited companies (PLC)
Limited liability partnerships (LLPs)
Certain other incorporated bodies

Sole traders and ordinary partnerships cannot be members of a VAT group. If you're a sole trader running multiple businesses, they're all part of your single VAT registration anyway — you don't need (and can't use) group registration.

Under Common Control

The entities must be connected through control. Specifically, HMRC requires that they satisfy one of these conditions:

One body corporate controls each of the others
One individual, partnership, or company controls all of them
Two or more individuals together control all of them

"Control" generally means holding more than 50% of the voting rights or the right to appoint the majority of the board of directors. So a parent company and its subsidiaries can form a group. Two companies owned by the same individual can form a group. But two companies owned by different, unrelated people generally cannot.

Established or Having a Fixed Establishment in the UK

Each group member must either be established in the UK or have a fixed establishment here. An overseas company with no UK presence can't join a UK VAT group.

Benefits of VAT Grouping

Simplify Inter-Company Transactions

This is the biggest practical benefit. If Company A provides management services to Company B, and they're both in the same VAT group, there's no need to issue a VAT invoice, charge VAT, or reclaim it. The transaction is simply ignored for VAT purposes.

For groups with extensive inter-company trading — shared services, management charges, internal supplies of goods — this can dramatically reduce the administrative burden. Instead of dozens of inter-company VAT invoices each month, you have none.

Avoid Irrecoverable VAT

This is where the real financial savings can lie. If one group member makes exempt supplies and another makes taxable supplies, a VAT group can sometimes reduce the total irrecoverable VAT.

Example without grouping:

Company A provides taxable consultancy services
Company B provides VAT-exempt financial services
Company A provides IT support to Company B for £100,000 plus £20,000 VAT
Company B can't reclaim the £20,000 VAT because it makes exempt supplies — it's an irrecoverable cost

Example with grouping:

Companies A and B are in a VAT group
The IT support from A to B is disregarded — no VAT is charged
The £20,000 irrecoverable VAT cost disappears

However, this benefit needs careful analysis. HMRC is aware of this advantage and has anti-avoidance rules. The group will still need to apply partial exemption rules at the group level, and the overall partial exemption position of the group might be less favourable than the individual positions of the members.

Single VAT Return

The group submits one VAT return instead of each member submitting their own. This simplifies compliance, reduces the number of filing deadlines to manage, and can reduce accounting costs.

Cash Flow Benefits

Within the group, there's no need to fund inter-company VAT payments. Without grouping, Company A would charge VAT to Company B, receive the cash, and pay it to HMRC — while Company B would pay the VAT and wait to reclaim it on their next return. Grouping eliminates this cash flow drag.

Risks and Disadvantages

Joint and Several Liability

Every member of the group is jointly and severally liable for the group's entire VAT debt. If the representative member fails to pay £500,000 in VAT, HMRC can pursue any group member for the full amount. This can be a significant risk, particularly if one group member is financially weaker than the others.

Before forming a group, consider what happens if one member gets into financial difficulty. The other members could end up liable for its VAT debts.

Partial Exemption Complexity

If the group includes members making exempt supplies, the partial exemption calculation is done at the group level. This can be more complex than individual calculations, and the result might not always be favourable. In some cases, grouping can actually increase irrecoverable VAT — the opposite of what you'd want.

Get specialist advice on partial exemption before forming a group that includes exempt activities.

Administrative Burden on the Representative Member

The representative member takes on all the VAT compliance responsibilities for the group. This means gathering information from every member, consolidating it, and filing a single return. For large groups, this can be a significant administrative exercise.

Changes to the Group

Adding or removing members requires notifying HMRC. If a company leaves the group (through sale, dissolution, or otherwise), there can be VAT consequences — particularly around assets transferred within the group at no VAT cost that are now leaving the group.

HMRC's Power to Refuse or Direct

HMRC has the power to refuse a VAT group application if they believe it would lead to VAT avoidance. They can also direct that certain entities must be included in or excluded from a group, or that a group be split up. This power is used sparingly, but it's worth knowing about.

How to Apply for VAT Group Registration

New Groups

If none of the entities is currently VAT-registered, the representative member applies for group registration using form VAT1 along with form VAT50 (for existing registrations joining a group) or VAT51 (for new registrations).

Adding to an Existing Registration

If the representative member is already VAT-registered and wants to add other entities, they complete form VAT50 for each entity joining the group.

What HMRC Needs

For each entity joining the group, you'll need to provide:

Company name and registered office address
Company registration number
Details of the controlling person or company
The nature of the business
Expected taxable turnover

HMRC typically processes group registration applications within a few weeks, though complex applications can take longer.

VAT Groups and the Flat Rate Scheme

VAT groups cannot use the Flat Rate Scheme. If any of the entities was previously on the Flat Rate Scheme, they'll need to leave it upon joining the group. The group must use standard VAT accounting (or the Cash Accounting Scheme if eligible).

Practical Considerations

Is It Worth It for Small Groups?

For two small companies with limited inter-company transactions, the benefits of VAT grouping may not outweigh the complexity and the joint liability risk. Grouping tends to be most beneficial when:

There's significant inter-company trading
One or more members make exempt supplies
The administrative simplification is genuinely valuable

Review Regularly

Your group structure should be reviewed periodically. Changes in the business — new activities, disposals, changes in turnover mix — can affect whether grouping remains beneficial. What made sense five years ago might not make sense today.

Get Professional Advice

VAT grouping has significant implications and getting it wrong can be costly. This is one area where investing in specialist VAT advice is almost always worthwhile — particularly around partial exemption and the interaction with other VAT schemes.

If you're managing the finances of a group of companies using Accounted, the consolidated view of transactions across entities can help you understand the inter-company flows and assess whether grouping would simplify your VAT affairs.

Summing Up

VAT groups are a valuable tool for related businesses with significant inter-company transactions or complex partial exemption positions. They can save real money and reduce administrative headaches. But they also introduce joint liability, can complicate partial exemption, and require careful management.

The key is to run the numbers before you commit. Model your group's VAT position with and without grouping, factor in the administrative costs and the liability risks, and make an informed decision.

Accounted helps UK sole traders stay on top of their bookkeeping and tax. Start your free 30-day trial at getaccounted.co.uk

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