UK VAT Grouping Policy Shift Aims to Attract Foreign Investment

Following the 2025 Budget, the UK tax authority, HM Revenue & Customs, announced a reversal of its position on value-added tax grouping, marking a significant policy shift with implications for cross-border corporate structures.

By confirming that the restrictive approach derived from EU case law doesn’t apply to UK VAT grouping provisions, the UK has signaled a more flexible regime that could reduce compliance burdens and encourage foreign investment.

HMRC’s reversal on VAT grouping appears to mark a strategic shift to attract investment and simplify cross-border VAT compliance. However, expanded revenue protection rules introduce new risks.

VAT grouping in the UK is governed by sections 43, 43A and 43B of the Value Added Tax Act 1994. These allow two or more “eligible persons” (corporates, individuals, or partnerships) to be treated as a single taxable person for VAT purposes. Section 43A(6)(a) defines a “UK body corporate” as one “which is established or has a fixed establishment in the UK.”

VAT grouping brings numerous benefits: It eliminates the need to account for VAT on intra-group supplies, simplifies VAT returns under a single representative, avoids reverse charges for overseas members, and disregards VAT on intra-group asset transfers.

EU Case Law

Because the UK VAT grouping regime was originally shaped by EU law, it has been heavily influenced by case law of the Court of Justice of the European Union.

In Skandia America Corp (USA), filial Sverige v Skatteverket, the CJEU held that when a non EU head office supplies services to its EU branch, and that branch is part of a domestic VAT group, those services constitute taxable supplies for VAT purposes.

Danske Bank A/S and others v Skatteverket, a reverse factual scenario, involved a VAT-grouped head office in one EU member country supplying services to a branch in another member country (where the branch wasn’t in a VAT group). The CJEU confirmed that the head office and the branch must be treated as separate taxable persons for VAT, and the branch couldn’t be part of the VAT group that the head office was part of.

UK Litigation

VAT grouping rules have been in the spotlight in the UK in recent years, driven by high-profile litigation before the Tax Tribunal. The most notable case is Barclays Service Corporation & Barclays Execution Services Ltd v HMRC which tested the boundaries of VAT grouping for non-UK corporates.

Barclays concerned a UK branch of a US company seeking to join its UK VAT group. HMRC opposed the application on two grounds:

• The US company didn’t have a fixed establishment in the UK under Section 43A.
• Even if it did, refusal was justified on “protection of the revenue” grounds.

HMRC also raised an argument based on Danske Bank, arguing that only the UK establishment (rather than the entire non-UK legal entity) qualified for VAT grouping.

The First-tier Tribunal (Tax Chamber) held that the US parent didn’t have a UK fixed establishment due to insufficient human and technical resources. However, the First-tier Tribunal rejected HMRC’s protection of revenue argument, noting that HMRC couldn’t reasonably refuse VAT grouping on this basis as any VAT savings were an ordinary consequence of grouping.

On the Danske Bank argument, the First-tier Tribunal declined to resolve this point as it wasn’t “equipped” to do so and, in any event, it would be neither “possible” nor “proper” for it to definitively interpret Section 43A on that basis.

Barclays has now been referred to the Upper Tribunal, with the appeal scheduled for March. The case has become a focal point for VAT grouping disputes, and numerous similar cases in the financial services sector are stayed pending its outcome. HMRC initially cross-appealed on the Danske Bank and protection of the revenue points; however, it’s uncertain whether those arguments will be pursued.

HMRC’s Policy Shift

HMRC published Revenue and Customs Brief 7 (2025), signaling a major departure from its previous interpretation of VAT grouping rules. In its November update, HMRC confirmed that overseas establishments of businesses “VAT grouped in the UK should be treated as part of that VAT group, even when located in an EU member state that does not operate whole entity VAT grouping.”

This effectively disapplies the restrictive approach derived from Skandia, removing a long-standing obstacle for cross-border groups. HMRC has also invited businesses that accounted for VAT in line with the previous guidance (dating back to 2015) to submit error correction notices to reclaim overpaid VAT.

Although the brief doesn’t explicitly reference Danske Bank, the reversal on Skandia suggests HMRC is moving away from both CJEU decisions. The timing of the announcement following the Budget indicates a deliberate policy choice to make the UK regime more attractive to foreign investment. It is also expected that HMRC will abandon its arguments in Barclays based on Skandia and Danske Bank, though this remains to be seen.

Against this backdrop, HMRC has tightened its interpretation of “protection of the revenue” in an update to its VAT Notice 700/2, expanding the definition to include “enhanced risks to the collection of revenue” and “distortion in the liability of the group’s supplies.”

Looking Ahead

This dual approach of relaxing cross-border rules while broadening revenue protection grounds creates a complex compliance landscape that businesses will need to navigate carefully.

Businesses should act now to review their structures, reclaim overpaid VAT, and monitor Barclays, as the regime evolves toward greater flexibility but closer scrutiny.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Anastasia Nourescu is a partner in the tax disputes department at Stewarts.

Mikolaj Kudlinski is an associate in the tax litigation and resolution team at Stewarts.

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