Market leading insight for tax experts
View online issue

Skandia: storm in a tea cup?

printer Mail

The CJEU’s judgment in Skandia (case C-7/13) has generated a lot of discussion since its release a few weeks ago. The case has been labelled as a major blow to many financial services groups with an EU branch structure and is generally seen as a landmark decision on cross-border supplies. However, in our view, the UK does not need to change anything following Skandia, taking into account the characteristics of the UK VAT grouping rules.

Background to Skandia

Skandia America Corporation (Skandia), established in the US, acted as global procurement entity for third party IT supplies. Skandia carried out its business in Sweden through a local branch (the branch), and the branch processed these services for onward supply to other companies within the Swedish VAT group of which it formed part, as well as to companies outside of the VAT group.

The Swedish Skatteverket was of the view that the supply of IT services from Skandia to the branch were subject to Swedish VAT, and that the FCE Bank principle concerning head office to branch transactions being outside the scope of VAT should be disapplied.

EU VAT grouping rules

Article 11 of Council Directive 2006/112/EC gives member states the option to regard persons who are closely bound to one another by financial, economic and organisational links, as one single taxable person for VAT purposes. As article 11 does not provide for any specifics on how the VAT grouping provision should be implemented, it is left up to the member states. As such, one member state may implement its VAT grouping rules completely differently from another member state.

An example of a different interpretation is the divergence between the VAT grouping schemes implemented by the UK and, for instance, Sweden. Swedish legislation states that only a taxable person’s fixed place of operations in Sweden may be allowed into a VAT group. This provision, clearly stating that VAT grouping is available only to the Swedish operations of a foreign entity, was introduced to clarify that foreign branches of Swedish established entities cannot be part of a Swedish VAT group. As such, Sweden provides for a branch to be treated as a separate taxable person from its head office, even though they form one single legal entity.

Contrast this to the UK VAT grouping rules where – if eligible to join a VAT group – the whole legal entity is part of the VAT group, including any non-UK establishments. The UK reinforced this view in its submissions in Skandia and the advocate general agreed, although this position is contrary to the Commission’s view on how VAT grouping should work. On the territoriality principle, the UK is of the view that a foreign entity is established in the UK through its local branch, not as the local branch.

The judgment in Skandia

The judgment in Skandia is brief and does not consider many of the issues raised by the advocate general. In particular, the judgment does not consider in any detail how the VAT grouping rules in article 11 should be implemented. Instead, it seems the CJEU focused only on the question posed to it; namely whether there was a taxable supply in the circumstances presented.

In paragraph 31 of the judgment, the CJEU concluded that ‘as that company (Skandia) and that branch cannot be considered to be a single taxable person’, there is a taxable supply from Skandia to its Swedish branch. This could be interpreted as meaning that the CJEU considers that a branch which is a member of a VAT group should be treated as separate and distinct from its overseas head office.

However, other language versions of the judgment, including the Swedish language version itself (the official language of the judgment), point to a rather different conclusion. It seems that the relevant phrase in the Swedish version translates as ‘under the premise that the company and its branch cannot be regarded as a single taxable person’. Other language versions use ‘insofar as’ (Dutch), ‘inasmuch as’ (German) and ‘to the extent that’ (French).

As such, the inclusion of the word ‘as’ in the English translation does not seem to fully capture the essence of this phrase. In our view, the judgment that the intra-company supply is taxable is based on the condition that local VAT law, as is the case in Sweden, considers that overseas establishments cannot form part of the VAT group.

Contrast this position to that of the UK, where overseas establishments are also considered part of a UK VAT group. In this case, it seems to us that the intra-company transaction should continue not to be considered as a taxable supply (subject to the UK anti-avoidance provisions in VATA 1994 s 43(2A)).

It is this subtle difference that arguably results in a completely different outcome for those member states that allow (or require) the entire legal entity to join the VAT group; with the entire legal entity in one VAT group, the head office and its branch are by default always regarded as a single taxable person. As the CJEU did not consider how the term ‘persons’ should be interpreted for the purposes of VAT grouping rules, this point remains for the member states to implement until a consistent position is reached across the EU.

Impact in the UK

The VAT grouping rules in article 11 allow the introduction of anti-avoidance measures. The UK has introduced its own anti-avoidance measure in s 43(2A). In essence, this disregards the effect of a VAT group by acknowledging a taxable supply between two VAT group members in relation to bought-in supplies. As such, UK legislation already covers any potential VAT avoidance arising from cross-border intra company supplies received by a VAT group.

Like Skandia, s 43(2A) ensures VAT is paid on third party services supplied onwards for the benefit of a VAT group. Therefore, there are reasonable grounds to consider that the UK does not need to change anything as a result of Skandia. It remains to be seen whether HMRC will share this view.

N.B. Since this article was authored, HMRC has confirmed that the Skandia judgment did not consider the validity of domestic grouping rules. Therefore, HMRC is considering what impact, if any, this decision has on the UK specific VAT grouping rules (Brief 37 (2014)).