What happened in Skandia?
The Skandia case concerned a US company made supplies from its US headquarters to its Swedish branch, which was not a separate entity. The branch was VAT grouped in Sweden.
The CJEU held that supplies were VATable because they were treated as made to the representative member of the VAT group.
The CJEU also confirmed (following FCE Bank) that even if a branch is not VAT grouped internal supplies from an overseas headquarters to that branch may still be subject to VAT if the branch bears economic risk and can, therefore, be regarded as independent.
This VAT (which the branch or VAT group may have to account for under the reverse charge mechanism) would be a substantial additional cost for VAT exempt business (e.g. banks and insurance companies).
Read more about the potential impact of this case.
What about the UK?
In situations such as the one in Skandia the UK rules provide for the whole entity to be VAT grouped, not just its UK branch.
HMRC has now published a brief to explain its position following Skandia, which is as follows:
- in Skandia the CJEU did not consider what the position under the UK rules should be nor whether the Swedish rules were the only permissible VAT grouping rules;
- HMRC needs to consider what impact, if any, this decision has on the UK rules and whether any changes are required; and
- in the meantime, businesses should continue to follow existing guidance.
Thus, for now at least, there should be no VAT on supplies from an overseas company to its UK branch if it is VAT grouped in the UK. That is because the UK rules group the whole entity, not just its UK branch. And in light of the first bullet point above it seems unlikely that HMRC will see any need to change this.
However, what the brief does not address is how HMRC will treat "supplies" from an overseas company to its UK branch if it is not VAT grouped. The CJEU was clear that an intra-entity supply from an overseas headquarters to its European branch can be a supply even if the branch is not VAT grouped. There is no reason why this should apply in the UK.
Non-UK banks, insurers and other financial services business with UK branches that are not VAT grouped should urgently consider whether to VAT group them. Whether this is necessary will depend, in part, on the extent to which the branch bears economic risk.
Given the amount of VAT potentially at stake even businesses with VAT grouped UK branches should consider making contingency plans to restructure in case the law does change.
HMRC will provide a further update "in due course".