HMRC confirms UK VAT accounting changes following Skandia judgment

The changes, which apply to transactions on or after 1 January 2016, will predominantly affect businesses operating in member states that operate 'establishment only' VAT grouping rules, as in the Skandia case ruled on by the Court of Justice of the European Union (CJEU) last year. Belgium, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Slovakia and Sweden apply this method, as does Spain in some circumstances, HMRC said.

The changes would only apply where tax authorities in these member states had implemented the CJEU's decision and required intra-entity transactions between the UK part of the business and the overseas part of the business to be treated as supplies for VAT purposes, HMRC said. The overseas part of the business "should take steps to establish with its member state tax authorities if this is the case", it said in a briefing note.

The change has come about as a result of the different ways in which EU member states have implemented VAT grouping rules, which allow closely-linked companies to be treated as a single entity for VAT purposes.

In the UK, companies must have an 'establishment' in the UK before they can join a UK VAT group but the whole company, not just the particular branch or head office located in the UK, becomes part of the UK VAT group. In Sweden and the other listed member states, only the branch or office located in that country becomes part of the VAT group.

In September 2014, the CJEU ruled services supplied by the US headquarters of Skandia, the insurance business, to a Swedish branch which was VAT grouped with other local companies were subject to VAT. The court said that because the branch of the US company was a member of the VAT group, it could no longer be treated as being the same legal entity as its US head office for VAT purposes. This was because the creation of the VAT group established a new entity for VAT purposes which was an amalgam of all its members.

If a similar scenario, in which services were provided by an overseas unit of the same company to a UK unit, had occurred in the UK this would not normally have been treated as taxable supplies for VAT purposes at all. This is because under UK rules the entire company, including the overseas unit, would have been grouped together for VAT purposes, meaning that the transactions would have taken place within the same taxable 'person'.

In its final briefing note on the impact of the Skandia judgment, HMRC confirmed its view that the change in tax treatment did not require any change to UK law. Instead, "they follow automatically in circumstances where the overseas establishment is recognised as part of a separate taxable person", it said.

"[I]n the UK's view the UK VAT changes are not required if the only VAT grouping is of the UK establishment," HMRC said in its briefing note. "UK VAT grouping is 'whole entity' and does not split the UK establishment off into a separate taxable person. The UK has informed other member states of the UK's view on this matter."

Although the changes do not come into force until 1 January 2016, businesses could choose to apply the changes earlier than this "provided they do so consistently for all services and establishments affected", HMRC said.

HMRC has set out how it expects each member state to implement the Skandia decision in its briefing note. However, it said that the intentions of Cyprus, Finland, Germany and the Netherlands were "uncertain".