Brief 2 (2015) provides further guidance on HM Revenue and Customs’ position following the European Court of Justice judgment in Skandia America Corp. (USA), filial Sverige (C-7/13). The Skandia case, as reported on several occasions by Chartered Accountants Tax News, held that supplies between the non-EU head office and the EU branch should be subject to VAT. The Revenue Commissioners are currently reviewing the implications of this CJEU ruling for Irish law.

Skandia recap

By way of reminder, 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. 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 and 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.

UK VAT grouping provisions

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

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.

Changes to UK VAT accounting

However, UK VAT accounting will be affected and VAT may become due. 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. This change in treatment must be applied to services performed on or after 1 January 2016 in order to allow businesses time to adapt. 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.

HMRC will also confirm which other member states will operate Swedish-style ‘establishment only’ VAT grouping following the Skandia decision as soon as possible.

More information is available in the Brief.