17 September 2014
On 17 September 2014 the Court of Justice of the European Communities (CJEU) gave its judgment in relation to Skandia America Corporation, case C-7/13. Surprisingly the CJEU found that a VAT group should be treated as a separate taxable person such that a supply by a Head Office in the US to a branch in a VAT group in Sweden was subject to VAT. The Swedish VAT should be accounted for under the reverse charge mechanism by the VAT group in Sweden.
The “re-regard” rules in UK law appear to be wholly unnecessary as a result of this finding, and it is to be expected that HMRC will issue a guidance note on their revised policy very soon. The new policy will add to the costs of many insurers who have branches of foreign companies in their VAT groups. As HMRC have previously accepted the treatment as argued for by Skandia America, this will entail a change in their policy which should be implemented from a future date. Nevertheless affected businesses should consider restructuring their groups to mitigate the impact expected.
The ruling relates to a Swedish VAT group and Sweden has announced it will withdraw VAT grouping from a future date. Perhaps this proposal will now be re-evaluated.
The ruling applies to all Member States, but it is not clear whether a VAT group in another country has to be treated as a separate taxable person. One major impact could be in relation to services recharged around a branch network in Europe. If there is a VAT group in the country of the Head Office, each branch may be approached by its local tax authority for a reverse charge on the consideration paid to the Head Office – on the grounds that it represents a supply from the (foreign) VAT group to the branch.
A defence against such an approach might be that there is no supply at all, as the CJEU states at one point in the judgment that a branch cannot be viewed as a taxable person. Further, if the branch is not in a VAT group it might be possible to argue that it is not a taxable person.
There are other aspects of the ruling which may have further effects, wherever there is a VAT group in place. Affected businesses should review their cross-charging between branches or between Head Office and branch, and the ongoing benefit of VAT grouping. Any necessary changes should be made in advance of possible challenges from the tax authorities throughout Europe.