Charging VAT between parts of the same business

When a service is supplied by one part of a taxable person (e.g. company, partnership, etc.) to another, the service is not usually considered to be a taxable supply.

However, in the case of Skandia America Corp. (USA), filial Sverige v Skatteverket ([2014] CJEU C-7/13, published on 17 September 2014) the court decided that the supply by the US establishment to the EC establishment within an EC VAT group should be subject to VAT.

In this case, the US headquarters had chosen to purchase an IT system for the global group and had carried out its activities in Sweden through the Swedish branch. The Swedish VAT authorities claimed that the recharge of costs by the US headquarters to the Swedish branch was subject to VAT in Sweden, even though the US headquarters and the Swedish branch were part of the same company.  The CJEU agreed that this was the case.

Although this case is set in the context of services received by a Swedish establishment which was a member of a Swedish VAT group from which the US establishment was excluded, many questions arise which could have significant consequences for taxpayers in the UK.

Consider the scenario where a member of a VAT Group has established a function in a non-EC jurisdiction, such as a call centre in India. Will it be necessary to quantify the value of that call centre function, and account for VAT in the UK?  Consider further if the VAT Group has an exempt or non-business activity in the UK, such as a bank, an insurance house, a charity – even an educational or medical centre.  Would the VAT which must now be accounted for become a new cost to the VAT Group?

Further questions arise. It is not clear what is meant when one establishment of a VAT Group member can be said to be supplying services to another establishment of the same VAT Group member.  Could HMRC require VAT to be accounted for when an office in another EC member state does something for a UK office (or vice versa)?  Could HMRC perhaps even claim that different establishments within the UK should be charging each other VAT for services supplied?  Such a change would not only impact how VAT is accounted for on the VAT Group’s returns, but could also cause a VAT cost to arise for exempt and non-business activities.

The UK government contributed to the Skandia case, and given the number of questions arising HMRC’s response to the court’s decision is keenly awaited.

For further information and help on accounting for VAT in cross-border matters, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.