Following closely the VAT and SDLT savings brought about by transfers of going concerns (TOGCs) to VAT groups (see our report here), the latest change from 1 January 2016 challenges when a member of a VAT group is not a member.
It can be an advantage for eligible businesses to operate under a single VAT registration number: the VAT group. Supplies between members of the same VAT group are disregarded for VAT purposes, which can result in a VAT saving if the group makes exempt supplies and cannot recover all its input tax on purchases from other businesses.
On 30 October 2015, HMRC issued Revenue and Customs Brief 18 (2015) excluding some suppliers from the advantages of belonging to a VAT group with effect from 1 January 2016.
The changes arise from the Swedish case Skandia America Corp. (USA), filial Sverige (C-7/13). The implication of the Skandia judgment is that an overseas establishment of a UK-established entity is a separate taxable person if the overseas establishment is VAT-grouped in a member state that operates ‘establishment only’ grouping provisions. This will be the case whether or not the entity in the UK is part of a UK VAT group.
The effect is that, in such circumstances, overseas establishments provide supplies to UK establishments for VAT purposes.
While this change might be unwelcome as leading to higher VAT costs, the issue is made considerably more difficult as different member states have different policies on whether to allow foreign establishments of locally-established businesses to be part of their VAT groups. In some cases, information is currently incomplete from the member states. HMRC’s policy is to reflect this variation across the EC, and the burden falls on the individual members to determine whether their supplies are disregarded or are subject to VAT (under the reverse charge or otherwise).
Under the new rules, businesses will treat intra-entity services provided to or by such overseas establishments as supplies made to or by another taxable person and account for VAT accordingly:
- 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 the UK. Under these circumstances the anti-avoidance legislation in VAT Act, Section 43(2A)-(2E) does not also apply, as the overseas establishment is not seen as part of the UK VAT group.
The above changes are only required where the member state of the VAT-grouped overseas establishment has implemented the Skandia decision and is requiring intra-entity transactions between this establishment and the UK establishment to be treated as supplies for VAT purposes. The overseas establishment should take steps to establish with its member state tax authorities if this is the case.
In particular, in the UK’s view the UK VAT changes are not required if the only VAT grouping is of the UK establishment. UK VAT grouping is ’whole entity’ and does not split the UK establishment off into a separate taxable person.
This will clearly be a complex area for businesses with VAT groups and international interests, and will require careful attention to the supplies cross-border which, although currently disregarded for VAT purposes, might now give rise to a VAT cost.
For further information and help on VAT groups, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.