On 10 February 2015, HMRC published guidance on the implication of the ECJ’s decision in Skandia. As a result there will be a change to the UK VAT treatment of intra-entity supplies of services, from 1 January 2016.
The announcement follows the ECJ decision in the Skandia case, discussed here last year. The ECJ ruled that services provided by a US insurer to its Swedish branch were subject to VAT in Sweden, a decision that caused immediate concern for insurers and other financial services groups across Europe. The settled approach had been to disregard such intra-entity supplies for VAT purposes.
The UK VAT grouping rules differ from those in operation in Sweden. Whilst in Sweden only the Swedish branch of an overseas company (and not the company itself) can be registered as part of a Swedish VAT group, in the UK the company (in its entirety) can be part of a UK VAT group.
In light of this differing approach, HMRC has taken time to consider what – if any – changes to the UK rules are required.
HMRC’s conclusion is that no legislative changes are necessary. To adapt the facts of the Skandia case, if the US insurer had a UK branch the whole legal entity (US HQ and UK branch) can continue to become part of a UK VAT group. Supplies between the HQ and branch should remain disregarded for UK VAT purposes.
That said, the ECJ Skandia decision has led to a change in HMRC practice. From 1 January 2016 (or earlier, by taxpayer election):
- if a member state adopts a “Swedish-style” approach to VAT grouping, whereby only the local branch (and not the entire entity) can be part of a VAT group, the local branch (Branch) will, for VAT purposes, be treated as part of a separate taxable person to the UK headquarters (HQ)
- UK-based businesses must treat intra-entity supplies of services by, or to, such Branch as distinct supplies attracting potential VAT charges
- services provided by Branch to HQ will usually, if taxable, be treated as taking place in the UK and subject to the VAT “reverse charge” rules
- services provided by HQ to the Branch will usually be treated as taking place outside of the UK (but may affect HQ’s right to claim input tax credit)
- the same treatment will apply to supplies between Branch and other UK VAT group members, if HQ is part of a UK VAT group.
HMRC has promised to confirm which of the other member states adopt a ‘Swedish-style’ approach to VAT grouping.
The revised UK VAT treatment could result in irrecoverable VAT for insurance groups and other financial services groups, if taxable supplies provided by a branch to its UK headquarters are now subjected to UK VAT.
The HMRC announcement can be viewed here