Root and branch changes to EU VAT rules on intra-entity supplies?
The European Court of Justice (ECJ) last week ruled that services provided by a US insurer to its Swedish branch were subject to VAT in Sweden. This widely reported decision is likely to have implications for insurers and other financial services groups across Europe.
The facts of the case concerned the supply of externally-purchased IT services by the US arm of Skandia (USHQ) to its branch in Sweden. The Swedish branch, which was registered as part of a Swedish VAT group, then on-supplied the IT services to other Skandia group companies (both within and outside the Swedish VAT group).
The Swedish tax authorities assessed the Swedish branch to VAT on the supplies it had received from USHQ.
The ECJ held that the Swedish branch was not an independent "taxable person" for VAT purposes in its own right. However, it was part of a Swedish VAT group the members of which, when taken together, do constitute a single "taxable person". The result, in the
eyes of the ECJ, was that USHQ was deemed for VAT purposes to have made a supply to the VAT group and not to its Swedish branch. Of potential significance is that the USHQ was not itself a part of the VAT group. This resulted in a Swedish VAT charge on the supply between USHQ and its Swedish branch.
Before going any further it is important to recognise that, despite attempts by the European Commission to harmonise the way in which each Member State provides for VAT grouping, the rules differ from jurisdiction to jurisdiction.
In Sweden, only the Swedish branch of an overseas company (and not the company itself) can be registered as part of a Swedish VAT group.
The UK VAT rules, in contrast, bring an overseas company (in its entirety) with a UK branch within a UK VAT group.
It remains to be seen whether the UK government feels it necessary to amend the UK VAT grouping rules, in light of the ECJ decision. The ECJ appears to have upheld the principle that supplies within a single legal entity do not give rise to a VAT charge, except where the non-EU company and its EU branch are separated by an existing VAT group. Where both the company, and its branch, are brought within the VAT group (as under current UK rules) it is far from clear how – if at all – the ECJ decision in Skandia would apply.
The existing UK VAT rules also contain an anti-avoidance provision that ensures that externally-purchased services, bought in from outside the UK, are subjected to VAT when supplied between UK VAT group members.
What is clear is that groups with branches in EU Member States will no longer be able to recharge services between their non-EU headquarters and EU branches with the same degree of confidence that no VAT charges will arise. It will be necessary to consider each branch jurisdiction and the way in which the VAT group rules have been implemented locally.
Any increased VAT charges resulting from the Skandia decision will of course most adversely impact insurance groups, and other financial services businesses, as such charges will not be recoverable.