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Skandia decision ‘may affect VAT groups’

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Advisers are warning that the recent CJEU decision in Skandia America Corp (C-7/13) could have a major impact on VAT groups across the EC.

Skandia concerned a VAT group in Sweden where one of the group members (the Swedish branch of a US company) was supplied by its US head office with externally purchased IT services. Martin Sharratt (Smith & Williamson) explained: ‘The taxpayer argued that the supply took place within the same company and was not therefore within the scope of the tax. However, the Swedish tax authority argued that VAT was due under the reverse charge provisions, on the grounds that the US head office was not part of the group. The court found that VAT was indeed due, but on a subtly different basis – the court ruled that the VAT group was a separate taxable person from any of its member companies, so that the services could not be regarded as supplied within the same company. It is this aspect of the decision that has implications for the UK and other member states.’

While HMRC is expected to give its reaction to the decision, Richard Woolich (DLA Piper) said: ‘The decision is likely to hit financial services companies, whose businesses are exempt and partially exempt, particularly hard, as these kinds of company often use branches to conduct overseas business and use VAT groups to minimize the VAT leakage on recharges. Many businesses with EU branches may therefore need to look again at how they structure and allocate the costs of their cross-border intra-group supplies of services.’

Andrew Bailey (EY), added: ‘Skandia marks a fundamental change in the VAT treatment of certain intra-company transactions. This isn’t just a UK issue; the effects will be felt across the EU. The question marks over whether there will be a transitional period before any changes come into effect will no doubt have caught the attention of major financial institutions.’

Writing in this week’s journal, Nick Skerrett and Gary Barnett said the judgment may ‘sound the death knell for [similar] branch planning arrangements’.

‘At this stage, it is unclear whether the UK will choose, or feel obliged, to change its practice on branch to branch supplies. If it does, then VAT will become chargeable on the acquisition of the services from the overseas head office. Concerns will of course turn to the potential retrospective application of the judgment. Until HMRC makes its position known, UK groups should sit tight, whilst considering what arrangements might need to be put in place if the current arrangements do need to be unwound,’ they added. ‘An early announcement by HMRC of its reaction to the decision is, accordingly, highly desirable.’

Issue: 1232
Categories: News , Indirect taxes , VAT