On 10 February 2015 the UK tax authority HMRC issued Revenue and Customs Brief 2 (2015) on VAT grouping rules and the Skandia judgment.

Skandia was a US corporation with a branch in Sweden. The branch in Sweden became part of a Swedish VAT group and the Swedish tax authorities treated transactions between the branch and the US parent as taxable transactions. The supplies were taxable because the parent company was outside the VAT group and the branch was within the VAT group, so the supplies were made between two separate persons from a VAT point of view. Skandia disagreed with this treatment and the matter was referred to the European Court of Justice (ECJ).

The ECJ ruled that under the VAT grouping rules in Sweden only the branch located in Sweden could be part of the VAT group. On entering the VAT group the branch had become part of a single taxable person that was different for VAT purposes from the US head office. The provision of information technology services from the head office in the US to the branch in Sweden was therefore a supply made between two different taxable persons and was liable to VAT. The Swedish VAT therefore had to be accounted for by the recipient of the services under the reverse charge mechanism.

UK VAT grouping rules

The UK rules on VAT groups provide that a company must have an establishment in the UK if it is to join a VAT group but if it chooses to become part of the VAT group the whole company is part of that VAT group and not just the establishment in the UK. Consequently services provided by the overseas parent to the UK branch or establishment would not be considered a taxable supply for VAT purposes and would not have VAT consequences.

Consequences of ECJ Skandia decision for the UK

The VAT grouping rule in the UK is not the same type of VAT grouping rule as that considered by the ECJ in the Skandia decision and HMRC does not consider that any changes to the VAT grouping provisions in the UK are required.

UK companies will however need to be aware of the Skandia decision when doing business in countries that have VAT grouping rules similar to Sweden. Where a Swedish branch of a UK company becomes part of a Swedish VAT group, the transactions between the UK parent and the branch in Sweden will be taxable supplies for VAT purposes. This will be the case whether or not the company in the UK is itself part of a UK VAT group. Businesses may therefore need to account for VAT in these situations.

The VAT consequences would therefore be:

• Services provided by a VAT grouped branch in a country with VAT grouping rules similar to those in Sweden to a UK parent would be treated as supplies made in the UK under the place of supply rules and would be subject to the reverse charge mechanism if they are taxable.
• Services supplied by a UK establishment of an overseas company to an overseas VAT-grouped establishment would be treated as supplies made outside the UK under the place of supply rules. They would be taken into account in computing the input tax credit for the UK establishment. If the supplies were of reverse charge services they would need to be reported on the trader’s European Sales Listing of those supplies.

HMRC is to confirm as soon as possible which other EU member states are operating Swedish type VAT grouping rules and update the guidance with this information. The change in VAT treatment will apply to services performed on or after 1 January 2016. The changes could be applied by a business before that date provided that they are applied consistently for all the services and establishments affected.