wholly owned subsidiary

we have a wholly owned sub whose sole purpose is to provide employee services to the holding company and all (wholly owned) other group companies. For the avoidance of doubt the turnover (group employment recharge) of the service company is nearly £2m per annum, which is made up entirely of the inter-company recharge.

the holding company and other subs are included within a VAT group. Should the service company be registered for VAT or are there any provisions in the VAT act which allow for group companies that only provide services intra-group to be excluded?

If the service company was registered in its own right then its outputs would be the groups inputs, so a zero sum game. If the service company was covered by the group registration the services would be excluded.

thoughts?