Businesses with a VAT group registration should urgently review their position following the judgment of the Court of Justice of the European Union (CJEU) in Skatteverket v Skandia America Corp (USA)
(Skandia), published on 17 September 2014.
It is an established principle of VAT that a head office providing services to its branch (or vice versa) is not making a supply for VAT purposes. The head office and branch are treated as a single entity for VAT purposes, as they do not act independently of each other. Therefore, any services passing between them are an internal transaction and outside the scope of the VAT system.
The Swedish case of Skandia, however, raised a new question. Could Skandia’s Swedish branch, which was a member of a Swedish VAT group registration, still be treated as part of the same entity as Skandia’s overseas head office? That is to say, by joining a VAT group, did the Swedish branch become ‘independent’ of the overseas head office? The CJEU concluded that it did and, as such, services supplied by Skandia’s overseas head office were subject to reverse charge VAT on the Swedish VAT group’s VAT returns.
This raises serious implications for businesses with similar structures, where the VAT group receiving the services is not entitled to full VAT recovery. The Skandia judgment makes no distinction between services supplied in-house or bought-in, although in some cases the latter will already be subject to a VAT charge, under the anti-avoidance rules. This case will be particularly relevant to businesses in the financial services sector, where VAT is often an irrecoverable cost.
There may, however, be ways of mitigating any VAT costs that arise as a result of Skandia. For example, removing the head office/branch from the VAT group, joint contracts of employment or cost sharing arrangements may offer a suitable solution.
The CJEU’s judgment will undoubtedly lead to a change of HMRC policy on the VAT treatment of head office to branch, branch to head office and branch to branch transactions. We await a formal policy announcement from HMRC, which we expect to implement a new policy from a current date. HMRC should allow a transitional period in which businesses will have an opportunity to restructure their arrangements, should they wish to do so, but this is to be confirmed. Businesses with a VAT group registration in the UK (or another EU member state) and an overseas head office or branch should review their position as a matter of urgency.
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