HM Revenue and Customs Brief 2/15-VAT grouping rules and the Skandia judgement
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Date issued 10 February 2015.
Purpose of this brief
Revenue
and Customs Brief 37/2014 (13 October 2014) explained that HM
Revenue and Customs (HMRC)
was considering the effect of the judgment of the Court of Justice of
the European Union (CJEU)
in Skandia America Corp. (USA), filial Sverige (C-7/13) on the UK VAT
grouping provisions. This brief notifies the outcome and provides
further guidance.
Who should read this
brief
UK VAT-registered traders who are members of a VAT group in
the UK or another EU member state, and have establishments (branches or
head offices) in other member states.
Background
Skandia America Corporation was a company incorporated in the
United States, with a fixed establishment (a branch) in Sweden. The
Swedish branch became part of a Swedish VAT group. The Swedish tax
authority viewed services provided by Skandia America Corporation to
its Swedish branch as taxable transactions. Skandia disagreed on the
grounds that these were intra-company transactions and consequently not
supplies for VAT purposes, following the decision in FCE Bank
(C-210/04). The matter was referred to the CJEU.
The CJEU
stated that under the Swedish grouping provisions only the branch that
was physically located in Sweden could belong to a Swedish VAT group.
The CJEU
ruled that consequently the branch in Sweden became part of single
taxable person (the group) different to the taxable person of the US
head office. So the provision of IT services by the head office to its
branch was a supply between 2 separate taxable persons and so liable to
VAT. The Swedish VAT group had to account for VAT on those services
under the reverse charge.
Under the UK’s VAT grouping provisions, a body corporate such
as a company must have an establishment in the UK to join a UK VAT
group. However, unlike in Sweden, 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 not normally supplies for UK VAT
purposes, as they are transactions within the same taxable person
Way forward
The Skandia judgment did not consider the UK’s different
rules, which allow the whole body corporate into the UK group, and so
did not rule this to be contrary to the VAT Directive. HMRC
consequently does not consider that any changes to the UK grouping
provisions are required.
The current grouping rules relating to UK VAT-grouped
companies with overseas establishments will therefore be maintained. If
an overseas company with a fixed establishment in the UK joins a VAT
group, the whole legal entity (the company and its branches) becomes
part of that taxable person.
However, UK VAT accounting will be affected and VAT may become
due in the circumstances set out in the next section.
VAT
changes resulting from the judgment
The implication of the Skandia judgment is that an overseas
establishment of a UK-established entity is part of a separate taxable
person if the overseas establishment is VAT-grouped in a member state
that operates similar ‘establishment only‘ grouping provisions to
Sweden. This will be the case whether or not the entity in the UK is
part of a UK VAT group. Businesses must treat intra-entity services
provided to or by such establishments as supplies made to or by another
taxable person and account for VAT accordingly:
- services provided by the overseas VAT-grouped establishment
to the UK establishment will normally be treated as supplies made in
the UK under place of supply rules, and subject to the reverse charge
if taxable
- services provided by the UK establishment to the overseas
VAT-grouped establishment will normally be treated as supplies made
outside the UK under place of supply rules. Therefore they will need to
be taken into account in ascertaining input tax credit for the UK
establishment. If the supplies are reverse charge services, they should
be reported on the trader’s European Sales Listing of such supplies
If the UK entity is in a UK VAT group, the same applies to
supplies between the overseas establishment and other UK VAT group
members in UK. Under these circumstances the anti-avoidance legislation
in VATA s43(2A)-(2E) does not also apply, as the overseas establishment
is not seen as part of the UK VAT group.
These changes of treatment do not require any change to UK law
they follow automatically in circumstances where the overseas
establishment is recognised as part of a separate taxable person.
HMRC
will confirm which other member states will operate Swedish-style
‘establishment only’ VAT grouping following the Skandia decision as
soon as possible, and update guidance accordingly.
When will the
change take effect
This change in treatment must be applied to services performed
on or after 1 January 2016. This will allow businesses time to adapt
administrative and accounting procedures. Businesses may choose to
apply the changes to services performed earlier than this date,
provided they do so consistently for all services and establishments
affected.
Relevant legislation
Article 11 of the Principal VAT Directive allows member states
to treat two or more connected businesses established in the territory
of that member state as a single taxable person (often called a VAT
group). VAT grouping is enacted into UK legislation by s43-43D VAT Act
1994.
About the Author
© Crown Copyright 2015.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2015-02-16 09:50:01 in Tax Articles
