HMRC published the above brief which confirms that it intends to legislate to give statutory effect to Extra Statutory Concession (ESC) 3.2.2 (which covers how a tax charge applicable to VAT groups should be calculated). This brief sets out the timetable for legislating and how the ESC should be interpreted in the interim.

HMRC have stated that as a result of the Wilkinson decision (R v HM Commissioners of Inland Revenue ex p Wilkinson [2005] UKHL 30), ESC 3.2.2 is not ‘Wilkinson’ compliant therefore the Government intends to legislate to give statutory effect to this ESC and will therefore commence a technical consultation on this matter shortly.

ESC 3.2.2 affects UK VAT groups with an overseas member that buys services from persons outside the VAT group and uses them to make supplies to the UK members.

Transactions between members of a VAT group are normally disregarded for VAT purposes. Anti-avoidance legislation was enacted in 1997 requiring a tax charge to be declared on certain supplies by the overseas members to the UK members of the group (a VAT group can contain members that are established overseas provided that they are also established in the UK).

The legislation applied the tax charge to the whole intra-group transaction whereas the avoidance scheme only related to services bought in from third parties.

ESC 3.2.2 was brought in to ensure that the anti-avoidance provision was limited to removing the tax advantage from such structures. It operates by restricting the tax charge to the value of reverse charge services bought in by the overseas member. Such services were listed in Schedule 5 VAT Act 1994. However, on 1 January 2010 the Place of Supply of Services rules changed and as a result, Schedule 5 became redundant and was repealed.

Where a group makes use of this ESC, HMRC have stated that it should be applied in a way that maintains its intended effect. To achieve this, reference to the now repealed Schedule 5 should be read as a reference to the new general rule for supplies to businesses, in VATA 1994 s7A(2)(a).

The ESC will continue to allow VAT groups to value the tax charge by reference to the services the overseas member has bought in that would now be treated as subject to UK VAT if the UK group member bought them direct. Evidence of the value of the services bought in, and that they have not been undervalued, will still be needed.

Visit http://www.hmrc.gov.uk/briefs/vat/brief1611.htm to read the Brief in detail.