The UK has issued Revenue and Customs Brief 18 (2005) explaining VAT grouping rules and the Skandia judgment. The VAT changes in the UK effective from 1 January 2016 result from the Skandia decision of the European Court of Justice (ECJ). The Skandia case had been referred to the ECJ by a Swedish court for a ruling and concerned the operation of the VAT grouping rules.

The implication of the Skandia judgment of the ECJ is that an overseas establishment of a UK entity is a separate taxable person for VAT purposes if it is part of a VAT group in an EU member state that has similar VAT grouping provisions to Sweden. This applies whether or not the entity in the UK is part of a UK VAT group.

As a result of this the services provided to or by the overseas establishment of the UK entity must be treated as supplies made to or by another VAT taxable person and VAT must be accounted for on this basis.

Services provided by the overseas establishment to the UK establishment would normally be treated as supplies made in the UK under the place of supply rules, and if taxable for VAT purposes they would be subject to the reverse charge mechanism.

Services supplied by the UK establishment to the overseas establishment that is part of an overseas VAT group will be considered as supplies made outside the UK. They will be taken into account in ascertaining the input tax credit for the UK establishment. If they are reverse charge services they must be reported on the European Sales Listing of such supplies.

If the UK establishment is part of a UK VAT group the same VAT treatment would apply to supplies between the overseas establishment and the other members of that UK VAT group located in the UK.

These changes in VAT treatment would only be required where the EU member state where the overseas establishment of the UK company is located has implemented the ECJ’s Skandia decision and requires the intra-entity transactions with the UK establishment to be treated as VAT supplies.

The UK considers that VAT changes are not required if the only VAT grouping is that of the UK establishment. In the UK a VAT group covers the whole entity and does not result in splitting the UK establishment into a separate VAT person. For this reason the UK changes only apply where there is an overseas VAT group including the UK entity’s overseas establishment.