EntitySpaces will work with a self-referencing many-to-many, but it does not generate the direct many-to-many hierarchical property to the self-referencing collection, nor will it generate the Associate/Dissociate methods. It only generates the two zero-to-many properties into the associative table. So, no, 'UserXGroup' will not be recognized as a many-to-many resolver (associative) table.
BTW, the current design sounds like a more properly normalized database than your proposed change. The fact that User and Group do not have the same fields, 'LastName' has to serve a dual purpose, two fields are un-used for Group, and the 'UserGroupType' field could make queries and saves more difficult, leads me to believe that the current design is "correct". And, you get the benefit of EntitySpaces many-to-many hierarchical properties.
Most guides recommend taking your database to at least 3rd normal form, unless there are good, practical reasons to de-normalize (meaning it solves more problems than it creates).
http://www.datamodel.org/NormalizationRules.html
David Neal Parsons
www.entityspaces.net