HMRC recasts VAT Grouping rules in bid to compete for global capital
- HMRC has fundamentally reset UK VAT grouping policy, moving away from EU-derived case law such as Skandia and Danske Bank, and allowing overseas establishments to be treated as part of a UK VAT group
- Significantly reducing cross-border VAT friction and reopening opportunities to reclaim overpaid VAT.
- This policy is shaped to help draw foreign investment structures to the UK.
- The more flexible regime is balanced by new revenue-protection powers, with HMRC expanding its discretion to refuse VAT grouping where it perceives collection risk or distortive outcomes
The UK has quietly but decisively rewritten the rules of engagement for VAT grouping, delivering one of the clearest post-Brexit signals yet that it intends to compete aggressively for internationally mobile investment. HMRC’s revised position dismantles a decade of restrictive interpretation rooted in EU jurisprudence and replaces it with a more commercially aligned framework for multinational groups.
From EU orthodoxy to UK pragmatism
VAT grouping in the UK has long been a powerful simplification tool, allowing related entities to operate as a single taxable person. However, its effectiveness was steadily eroded by imported EU case law—most notably Skandia and Danske Bank—which treated branches and head offices as separate VAT persons when one sat inside a VAT group and the other did not. The result was a patchwork of internal VAT charges that undermined neutrality, particularly for financial services and global treasury structures.
Although the UK left the EU, HMRC continued to apply these interpretations in practice. That position has now changed.
HMRC draws a line under Skandia case
In Revenue and Customs Brief 7 (2025), HMRC confirmed that overseas establishments of UK VAT-grouped entities are to be treated as members of the UK VAT group—even where the overseas jurisdiction does not recognise whole-entity VAT grouping. In effect, internal cross-border services within a group once again fall outside the scope of VAT, restoring the core purpose of grouping.
This is not a technical clarification; it is a policy reset. HMRC has explicitly invited businesses that applied the former guidance to revisit prior periods and correct over-declared VAT, potentially unlocking significant recoveries.
Litigation as the catalyst
The shift cannot be viewed in isolation from ongoing UK litigation, particularly the Barclays VAT grouping case. That dispute exposed the fragility of HMRC’s reliance on EU authorities when interpreting UK domestic law. While the tribunal proceedings focused on fixed establishment tests and revenue protection arguments, the broader issue—whether EU grouping logic should survive Brexit—remained unresolved.
HMRC’s revised guidance strongly suggests that the department no longer wishes to test that question in court.
A more attractive, but more discretionary UK regime
At the same time as removing EU-driven constraints, HMRC has reinforced its domestic safeguard mechanisms. Updates to VAT Notice 700/2 expand the meaning of “protection of the revenue” to include wider concerns around collection risk and distortive outcomes. This gives HMRC greater latitude to deny VAT grouping where it believes the result would undermine the integrity of the VAT system—even in the absence of avoidance.
In short, the UK has traded EU rigidity for domestic discretion, betting that simplicity and flexibility will prove more attractive to global business than strict doctrinal purity
See more in the UK VAT guide.
