Two recent European court cases could have a substantial impact on the VAT costs of partially exempt businesses with a branch structure.
In the Crédit Lyonnais (C-388/11) case, the Court of Justice of the European Union (CJEU) considered whether a head office could, or should, take into account the activity of a branch located in another jurisdiction when completing its partial exemption calculations. “The CJEU ruled that it should not,” says Moore Stephens VAT expert Robert Facer. “The head office should look only at activity in its own jurisdiction.”
HMRC confirmed in this year’s Budget that it would implement the Court’s decision in UK VAT policy. “So even if including branch activity outside the UK would improve the VAT recovery rate for a partially exempt business, HMRC won’t now allow it,” Robert says. “In the past, HMRC’s stance has depended on the particular circumstances.” Businesses will have to implement the change from the next partial exemption VAT year commencing on or after 1 August 2015.
What if a branch joins a VAT group?
HMRC’s policy is also about to change for transactions between a branch and head office (or between two branches). The result could be a substantial increase in VAT costs for some businesses.
In the past, transactions between a branch and a head office (or between two branches) have been disregarded for VAT purposes, because they are parts of the same legal entity. This position was confirmed in 2006 by the CJEU ruling in the FCE Bank plc (C-210/04) case. However, a recent case involving Skandia America Corp (C-7/13) considered what happens when a head office or a branch joins a VAT group. Does the same treatment apply?
“The CJEU has ruled that putting a head office or a branch into a VAT group does make a difference, because the VAT group has its own identity,” Robert says. “Therefore, transactions between the head office and the branch (or between two branches) can no longer be considered as taking place between parts of the same entity. Consequently, such transactions may be subject to VAT.”
In Skandia, a US head office was supplying IT services to a branch in a VAT group in Sweden. Under the CJEU ruling, the Swedish VAT group had to account for reverse charge VAT, resulting in a substantial VAT cost.
“This is a real issue for businesses,” Robert says. “Following the Skandia judgment, HMRC has said there will be a change in UK policy from 1 January 2016.” However, the new policy will only apply where there is a head office or branch in a VAT group in another member state that applies the VAT grouping rules in the same way as Sweden. “This added complication is due to the fact that the VAT grouping rules are not applied consistently across the EU,” Robert explains. “Sweden and many other member states have a different approach to the UK. The challenge for businesses will be to identify which member states apply the VAT grouping rules in the same way as Sweden.” HMRC plans to publish a list of such countries to help businesses apply the new policy.
Financial services impact
The decision has particular impact in the financial services and insurance sectors, where branch structures are widespread, being seen as a VAT efficient way to structure transactions between, for example, a UK head office and European branches.
Understandably, the main focus following the Skandia judgment has been on the risk of additional VAT costs. However, it could be good news for some businesses. For example, a financial services firm in a Swedish style VAT group providing services to a non-EU branch may now be able to include such transactions in its partial exemption calculations, potentially increasing its VAT recovery rate.
As the Skandia judgment could result in substantial VAT costs for many businesses, the issue has attracted the attention of the European Commission. “Discussions are taking place about the case and its implications,” Robert says. “So it’s is likely that we will see future developments.”
Businesses with a branch structure (or considering such a structure) should review their VAT position carefully in light of the above policy changes. For more information, please contact Robert Facer