As reported earlier, the decision of the Court of Justice of the EU (CJEU) in the Skandia case [Case C-7/13] could impact VAT groups across the whole of the EU. Just how big the impact is, is still not entirely clear, despite HMRC having released a Revenue & Customs Brief setting out its view of the UK impact of the decision [Brief 2/2015].

The case concerned a VAT group in Sweden where one of the group members (the Swedish branch of a US company) was supplied by its US head office with externally purchased IT services. Skandia argued that the supply took place within the same company and therefore it was not within the scope of VAT. The Swedish tax authority argued that VAT was due under the reverse charge provisions, on the grounds that the US head office was not part of the group, but its Swedish branch was. The CJEU found that VAT was indeed due, but on a subtly different basis. It ruled that the VAT group was a separate taxable person from any of its member companies, so that the services supplied by the US head office could not be regarded as supplied within the same company. It is this aspect of the decision that has implications for the UK and other member states.

The consequences, should this decision be applied strictly, would be that any branch-to-branch supply across borders, in either direction, where one of the branches is in a VAT group would come within the scope of VAT. This would particularly affect financial institutions that are generally not entitled to recover their input tax in full.

HMRC has now considered the Skandia decision in the light of the UK VAT grouping rules, which are not exactly the same as in Sweden. HMRC consider the existing UK VAT grouping rules can remain unchanged. There will, however, be a change in UK VAT accounting from 1 January 2016, and many 'internal' cross-border supplies, that have so far been outside the scope of VAT, will be treated as transactions between third parties.

HMRC will only apply the revised accounting treatment in relation to countries where the overseas VAT grouping rules are similar to those in Sweden. Supplies involving countries with UK-style VAT grouping rules, i.e. where the whole body corporate is seen as part of the VAT group, would still be regarded as outside the scope of VAT. HMRC will provide more guidance on which countries have similar VAT grouping rules to Sweden at a later stage.

Meanwhile, questions on the applicability of the Skandia decision are being raised and debated, including in the following scenarios.

  • Head office/establishment are in different member states of the EU
  • Countries/scenarios where anti-avoidance measures are already effectively in place
  • Charges for services not bought in from a third party and recharged, but which are internally generated or constitute transfer pricing adjustments.

What next?

While it appears that HMRC is trying to preserve, as far as possible, the current favourable VAT position for VAT groups operating internationally, there is limited room for manoeuvre, because the UK must be seen to comply with European VAT law. Other member states are also reviewing the implications of this decision and it is difficult to see how this decision can be applied in anything but a uniform manner across all EU member states. In our view, it would also be difficult to see scenarios involving third countries (i.e. non-EU countries) being treated differently to scenarios only involving EU member states. We would not be surprised to see this leading to further case law developments with regard to the VAT grouping rules.

Although HMRC says that the changes will not apply before 1 January 2016 and that further guidance will be issued, businesses affected should start reviewing their intra-group services, and potentially their group structure, now.

Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

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