HMRC has concluded that the CJEU's decision in Skandia, regarding intra-entity supplies, does not require the UK to amend its VAT grouping rules. The decision nonetheless has implications for any group which makes supplies between a company and its branch in another jurisdiction, where either that branch or head office is part of a single-jurisdiction VAT group.
In Skandia, the CJEU considered that the supply from Skandia US (head office) to its Swedish branch should not be disregarded for VAT purposes even though the two were part of the same legal entity. This was on the basis that the supplies were made to the Swedish VAT group of which the Swedish branch was a member, rather than the branch itself. In other words, the branch had become a part of a single taxable person (the VAT group) which was different from the taxable person of the US head office (which was not, and could not be, a member of the Swedish VAT group itself).
The supply of the services between these separate persons therefore constituted a taxable transaction for VAT purposes, with the VAT group being liable for the VAT as the purchaser of those services.
Effect on UK transactions
Under the UK's VAT grouping provisions, a body corporate must have an establishment in the UK to join a UK VAT group. However, once grouped, the whole body corporate is part of the VAT group, not just the establishment (branch or head office) in the UK. Therefore, services provided between an overseas establishment and a UK establishment of the body are normally disregarded for UK VAT purposes, as they are transactions within the same taxable person. This contrasts with the position in Sweden where only establishments in Sweden may be VAT grouped.
However, the Skandia judgment means that an overseas establishment of a UK entity is part of a separate taxable person if the overseas establishment is VAT grouped in a member state that operates similar grouping provisions to Sweden, i.e. that only the branch physically located in the country can belong to the VAT group. This will be the case whether or not the establishment of the entity in the UK is part of a UK VAT group.
Intra-entity transactions involving a UK establishment will therefore be affected as follows:
- Services supplied to a branch in the UK by an establishment of an EU corporate that is part of a "Swedish-style" VAT group will now suffer reverse charge VAT in the UK on the costs charged to the UK, whether the costs are internally generated or recharged third party costs.
- Services supplied from the UK to an EU establishment which is part of a "Swedish-style" VAT group will no longer be disregarded. If the UK taxpayer is partially exempt, this will improve the input tax recovery position, although this is likely to be at the expense of increased reverse charge VAT costs in the other jurisdiction.
- Services supplied from or to a UK establishment of: (1) a non-EU corporate; (2) a non-VAT grouped EU corporate; or (3) an EU corporate that is VAT grouped in a jurisdiction that has similar VAT grouping rules to those in the UK, should be unaffected by the Skandia decision.
This potentially causes a distortion of competition and does not seem defensible on logical grounds. However, it seems that HMRC was keen to make as few changes to the status quo in this area as possible, following Skandia, and was not prepared to disrupt what had become relatively common VAT structuring for exempt or partially exempt corporate groups, particularly in the financial services industry.
The new rules will come into effect from 1 January 2016, although businesses may choose to apply them to services performed earlier than this date, provided they do so consistently for all services and establishments affected.
In the meantime, businesses will need to do a full survey of all services provided intra-entity to determine which previously disregarded supplies will now be treated as VATable, thus impacting on reverse charge costs and input tax recovery.
Skandia: Revenue and Customs Brief 2/15
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