VAT grouping continues to be one of the more complex areas of indirect tax for businesses operating across multiple jurisdictions. Differences in how countries apply VAT grouping rules, coupled with increased scrutiny of cross-border arrangements, mean that group structures require ongoing review.

During the last 12 months, the UK has extended its ‘whole entity’ approach to VAT grouping, further departing from EU orthodoxy. Ireland has moved in the opposite direction. Meanwhile, the European Court (CJEU) and UK tribunals have considered the application of revenue protection powers to VAT groups.

These developments create both opportunities and challenges for businesses with international operations.

HMRC changes course on VAT grouping

In Revenue and Customs Brief 7 (2025), HMRC confirmed a major change to its approach to cross-border transactions involving branches and VAT groups.

Historically, following the CJEU decisions in Skandia and Danske Bank, HMRC required UK businesses to account for VAT on certain transactions between a UK establishment and an overseas branch. This applies where one establishment was part of a local VAT group in a country applying an ‘establishment-only’ approach to VAT grouping.

HMRC is now consistently applying a whole entity approach. This means transactions between a UK establishment and an overseas branch should generally be disregarded for UK VAT purposes, even where the overseas establishment belongs to a local VAT group.

HMRC is accepting retrospective claims where businesses have previously accounted for VAT under the reverse charge and suffered a restriction in VAT recovery. While the practical impact may be limited for businesses with full VAT recovery, it could result in significant refund opportunities for those that do not enjoy full VAT recovery, particularly in the financial services sector.

Businesses should review whether they have previously accounted for VAT under the reverse charge on transactions between UK and overseas establishments. If so, they should consider whether any of that VAT was irrecoverable due to partial exemption restrictions. Where this is the case, there may be an opportunity to submit historic claims and recover additional VAT.

UK VAT grouping is becoming increasingly different from the EU

There is a growing divergence between UK and EU VAT grouping rules.

Many EU Member States continue to apply an establishment-only model. Ireland, previously one of the few exceptions, switched to that model at the same time as the UK’s announcement to the contrary.

As a result, multinational groups may face situations where a supply is disregarded in the UK but still gives rise to VAT obligations elsewhere.

This creates additional complexity and increases the importance of understanding VAT grouping rules in each jurisdiction where the business is established.

Protecting revenue and preventing avoidance

There have also been developments in tax authorities’ approach to denying VAT groups for revenue protection or anti-avoidance purposes.

HMRC updated and revised its guidance in VAT Notice 700/2 on the use of its revenue protection powers. HMRC will now apply these powers where it appears that the main reason for a VAT group is to disregard supplies between establishments located in different countries.

There is fresh support from the UK tribunals for this approach. In Barclays Service Corporation v HMRC, the Upper Tribunal considered that the limits to the UK’s cross-border application of VAT grouping were uncertain. However, it ruled that HMRC had a broad power to apply their revenue protection powers in such situations.

Similarly, the CJEU considered VAT grouping and anti-avoidance in Sampension Livsforsikring. While the Danish rules in that case may have gone beyond what the CJEU expected, it is clear from the court’s judgment that Member States have considerable autonomy over VAT group eligibility rules.

What should multinational businesses do now?

Businesses with cross-border structures should reassess their VAT position.

Key questions to ask include:

• Is there an opportunity to submit a historic VAT reclaim?
• Does the new policy reduce VAT recovery on overhead costs?
• Could overseas establishments still face VAT obligations in local jurisdictions?
• Are existing VAT grouping structures robust if challenged?

As VAT grouping, transfer pricing and cross-border service arrangements continue to attract increased scrutiny, businesses should ensure that their structures remain commercially supportable and VAT efficient.

Key considerations for businesses

HMRC's return to a whole entity approach is a positive development for many and may create valuable refund opportunities for affected businesses. However, it also reinforces that VAT grouping is no longer a straightforward administrative simplification in cross-border structures.

With the UK increasingly diverging from EU VAT grouping rules and HMRC taking a closer look at overseas arrangements, now is a good time for businesses to review both historic positions and future group structures.

For more information or to discuss how the latest changes could affect your VAT position, please get in touch with David McDonnell or your usual RSM contact.

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