Cross border supplies between a company's office and its branches
The UK has published a business brief confirming its views as to the implications of the decision of the CJEU in Skandia (Case C=7/13) (which held that services provided by a head office in the United States to a branch in Sweden which had been brought within a VAT group should be subject to VAT). This decision sent shockwaves through international groups, particularly those in the financial and insurance sectors for whom irrecoverable VAT can be a significant cost.
Where services are supplied between a head office and a branch, FCE Bank (Case C-210/04) confirms that there is no supply for VAT purposes because the branch and the head office are the same person. The CJEU distinguished this in Skandia by holding that where services are supplied by a head office to its Swedish branch which is a member of a VAT group, there was a supply on which VAT should be charged. This decision relied on two fundamental propositions – first, only the Swedish branch was a member of the VAT group (the head office was not) and second, the head office and the Swedish branch were given separate identities for VAT purposes (on the basis that a VAT group has a separate identity to its members).
HMRC has recognised this distinction by seeking to limit the application of the Skandia judgment to those branches which are VAT grouped in a Member State, which allows only the branch (and not the company in its entirety) to join the VAT group (so-called “establishment only” groupings). The UK does not have “establishment only” grouping – an entire company, including head office and any branches, join a VAT group together. HMRC has indicated that they will publish a list of the jurisdictions which they consider have “establishment only” grouping.
The effect of this approach is that supplies made between a head office and a branch or between two branches can have VAT implications in the UK where:
- A company has an overseas branch which is a member of a VAT group to which the company does not belong and that overseas branch supplies services either to a UK branch or the UK head office of the same company.
In this situation, the UK VAT rules provide that the supply is made in the UK and will require the company to account for VAT under the reverse charge mechanism. Where the company can recover UK VAT in full, this should have little practical impact. However where the company is unable to recover the VAT in full, this will result in a real cost to the company.
- A company has an overseas branch which is a member of a VAT group to which the company does not belong and that overseas branch receives services either from a UK branch or the UK head office of the same company.
In this scenario, it will be necessary to look at the nature of what is being supplied to the overseas branch, and to take that supply into account in determining how much VAT the company can recover.
These changes to the way VAT is imposed will apply in the UK to services performed on or after 1 January 2016. Businesses have the opportunity to opt to implement this treatment at an earlier date.
It is expected that other tax authorities will publish their views shortly. It is anticipated that the Netherlands will take a largely similar position to the UK. March 2015 is likely to be a busy month - the German revenue is due to confirm their position and the European Commission is meeting with the Member States to discuss the implications of Skandia. Affected organizations will need to consider how to structure internal supply arrangements. One possible approach might be to use cost sharing arrangements. Such arrangements need careful consideration as the requirements for VAT exemption are strict and direct tax issues can also arise.