UK and International Tax news

HMRC Issues Guidance On VAT Treatment Of Costs Recharged To Overseas Branch

Wednesday 18th February 2015

In September 2014, the CJEU issued its judgment in a case involving a US resident company recharging a proportion of IT costs to its Swedish branch which formed part of a VAT group in Sweden [see out International Tax News item of 29 September 2014].

In Skandia America Corp (USA) filial Sverige v Skatteverket [C-7/13], the Court held that whilst the branch did not carry out an independent economic activity distinct from its Head Office, by joining a VAT group, the branch became part of a single taxable person such that the Head Office supplied services not to the branch but to the VAT group.

The Court did not follow the earlier opinion of the Advocate General, which confirmed that cross border branch/head office transactions were not supplies for VAT purposes and this also applied to the situation of a branch in an EU VAT group, and held that the VAT group was required to account for VAT under the reverse charge rule.

HMRC released Brief 37/2014 in October 2014 which explained that HMRC would consider the effect of the judgment on UK VAT registered traders who are members of a VAT group in the UK or another EU member state and have establishments (branches or head offices) in other member states.

HMRC has now issued Brief 2/2015 which confirms that the Skandia judgment did not consider the UK’s different rules, which allow the whole body corporate into the UK group, and so did not rule this to be contrary to the VAT Directive. HMRC does not consider that any changes to the UK grouping provisions are required.

The current grouping rules relating to UK VAT-grouped companies with overseas establishments will therefore be maintained. If an overseas company with a fixed establishment in the UK joins a VAT group, the whole legal entity (the company and its branches) becomes part of that taxable person.

The implication of the Skandia judgment is that an overseas establishment of a UK-established entity is part of a separate taxable person if the overseas establishment is VAT-grouped in a member state that operates similar ‘establishment only‘grouping provisions to Sweden. This will be the case whether or not the entity in the UK is part of a UK VAT group. Businesses must treat intra-entity services provided to or by such establishments as supplies made to or by another taxable person and account for VAT accordingly.

Therefore, services provided by the overseas VAT-grouped establishment to the UK establishment will normally be treated as supplies made in the UK under place of supply rules, and subject to the reverse charge if taxable.

Services provided by the UK establishment to the overseas VAT-grouped establishment will normally be treated as supplies made outside the UK under place of supply rules. Therefore they will need to be taken into account in ascertaining input tax credit for the UK establishment. If the supplies are reverse charge services, they should be reported on the trader’s European Sales Listing of such supplies.

If the UK entity is in a UK VAT group, the same applies to supplies between the overseas establishment and other UK VAT group members in UK. Under these circumstances the anti-avoidance legislation in s.43(2A)-(2E) VATA does not apply, as the overseas establishment is not seen as part of the UK VAT group.

HMRC advises that these changes of treatment do not require any change to UK law as they follow automatically in circumstances where the overseas establishment is recognised as part of a separate taxable person.

HMRC will confirm which other member states will operate Swedish-style ‘establishment only’ VAT grouping following the Skandia decision as soon as possible, and update guidance accordingly.

This change in treatment must be applied to services performed on or after 1 January 2016. This will allow businesses time to adapt administrative and accounting procedures. Businesses may choose to apply the changes to services performed earlier than this date, provided they do so consistently for all services and establishments affected.

This ruling is likely to have serious implications for overseas financial services groups with EU operations which buy in services from outside the EU.

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