To VAT group or Not? ECJ Decision in the Case of Skandia

HMRC have announced that changes will be implemented to VAT accounting for VAT groups in light of the European Court of Justice decision in the case of Skandia America Corporation (Skandia). This case is interesting as it highlights the differences in how VAT law has been interpreted and introduced in each member state of the EU. It also highlights the potential cost to businesses who assume that the same rules apply when accounting for VAT in each member state. This is very often not the case.

Skandia is a USA business with a branch in Sweden, which became part of a Swedish VAT group. Although the entity in Sweden was a branch and not a separate legal entity to Skandia the Swedish authorities tax took the view that the US business was making VATable supplies to its Swedish branch. Given that previous case law indicated that transactions within the same entity were not supplies for VAT purposes the business disagreed with the tax authorities view. The ECJ has now ruled that a business that is physically located in Sweden can only be included in a Swedish VAT group, and that by VAT grouping its Swedish branch, Skandia became a different VATable person to that of the US business. This made supplies from the US company to the branch subject to a reverse charge in Sweden.

HMRC have stated that this decision does not change the UK VAT position for VAT groups as in the UK we look at the entity rather than the establishment. However, where an overseas establishment of a UK established entity is part of a VAT group in a member state that has similar rules to Sweden (allowing only the part of a business that is established in the member state to be within the VAT group) UK businesses must treat intra-entity services provided to or by such establishments as being supplies made to a separate legal entity with effect from 1 January 2016. This means that supplies made to or by another taxable person will need to be identified with VAT accounted for VAT accordingly. HMRC will provide guidance at a later date on which countries have the same VAT grouping establishment rule as Sweden.

Whilst this may all seem a very academic exercise as the supplies in question were reverse chargeable when received by the VAT group from Skandia, if it or any other business in similar circumstances has less than 100% VAT recovery the reverse charge creates a VAT cost to the group that would previously have been avoided by VAT grouping.

It is worth seeking advice if you or your client are currently in a VAT group or have a corporate group with members that are separately VAT registered. VAT grouping can save businesses in terms of reducing VAT on transactions within the group but can also have unforeseen consequences. Please call our free VAT helpline for an initial discussion to identify if there are any VAT savings or VAT issues that may require our assistance.

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