The UK has long been a hotspot for international investment and it remains the second-largest recipient of Foreign Direct Investment (FDI), according to a survey by PwC.
However, there are some administrative hurdles and VAT burdens that could be holding you back from taking that leap and investing in the UK.
HMRC is on a mission to make the country a more attractive destination for investment and the process easier for multinational companies.
One way they are doing this is through the reversal of VAT grouping and this could benefit your company more than you realise.
What is the VAT grouping reversal?
In the Autumn Budget 2025, HMRC reversed its policy on cross-border VAT grouping.
This means that overseas establishments and foreign branches that have a UK presence are now treated as part of the UK VAT group. It also disregards VAT on intra-group services and eliminates reverse charge liabilities.
HMRC’s previous approach was influenced by EU case law and many overseas companies and foreign branches were often excluded from VAT groups.
This created complications for multinational organisations, especially when services were provided across borders.
How does the reversal encourage foreign investment?
This change sends a deliberate message to global investors that the UK is making it easier for multinational companies to operate efficiently.
Businesses can now organise their operations with more flexibility and this should encourage multinationals, particularly those in financial services and insurance that rely on cross-border branches, to invest in the UK.
In addition, allowing foreign establishments to be part of a UK VAT group eases the administrative burden for overseas establishments and foreign branches with a UK presence.
It also means that the cost of setting up UK operations is reduced and the ability to recover VAT on internal recharge is improved.
Historic VAT recovery opportunities
Companies that applied the previous guidance might have actually overpaid VAT on intra-group transactions involving overseas branches.
HMRC is now allowing these businesses to submit error correction notifications to reclaim overpaid VAT for up to four years.
This creates the potential for substantial financial recovery and offers businesses a cash boost that can be reinvested in their UK operations.
Is the reversal all positive?
The policy shift is undeniably positive, but its success in driving foreign investment is yet to be fully proven.
Businesses will be watching closely to see how consistently the new approach is applied and whether it delivers the anticipated benefits.
There are also additional stricter anti-avoidance measures that have been introduced that businesses need to be aware of.
VAT groups may be at risk of being disbanded if HMRC believes the main purpose of the arrangement is to avoid VAT on cross-border supplies.
How can we support foreign investment in the UK?
The UK is brewing with opportunities for foreign investment and we want to help make sure none of the financial requirements and compliance risks holds you back.
Our team can help your business manage its VAT obligations and spot any opportunities for recovery.
We will work alongside our international firm to help your business remain compliant in the UK and across the relevant jurisdictions.
If you need further support with setting up in the UK, contact our team.