The aftermath of Skandia – Angela Lang-Horgan asks where does UK VAT grouping go from here?
Angela is a member of the same VAT Practitioners Group (VPG) Chapter as Ann. Interestingly, Angela was the only Chapter member to accurately predict the implications of this case based on the Advocate General’s Opinion – although the European Court has not followed that Opinion it has proved Angela right.
On 17 September 2014 the European Court came to the ground-breaking and, to UK practitioners, somewhat surprising decision in Skandia America Corp. (USA) filial Sverige, v Skatteverket, that a non-EU company and its dependent branch in the EU cannot be treated as a single taxable person where the branch belongs to a VAT group. This means that supplies of services from the non-EU company to the EU branch are taxable supplies. HMRC’s long-standing practice of including a foreign company in its entirety in a VAT group, if it has a fixed establishment in the UK, is therefore flawed.
Non-EU companies especially from the partially-exempt financial, insurance, medical, and betting sectors, who benefitted from VAT grouping in the past, are likely to face an additional VAT bill for cost recharges of, for example, licences, patents, trademarks, IT services, or marketing which have been generated by those companies themselves and recharged to their dependent UK branches in the same VAT group.
Are the UK VAT grouping rules at risk?
Article 11 of Directive 2006/112/EC allows Member States to treat legally independent persons as members of VAT groups, provided that those persons ‘are closely bound to one another by financial, economic and organisational links’. Once a Member State has introduced VAT grouping provisions, the EU parameters have to be met. It is difficult to see how these parameters are respected by the UK’s VAT-grouping provisions in sections 43A – 43D VATA 1994.
In 1987 Germany restricted the effects of its VAT grouping rules to those parts of companies established in Germany, after the EU Commission had won treaty violation proceedings on the grounds of non-observance of the principle of territoriality (see Klenk F. Annotation to § 2 UStG. In: Wagner W (ed.), Soelch/Ringleb Umsatzsteuer. Beck’sche Steuerkommentare, 67th Edition, Munich, Verlag C. H. Beck; 2012. para 150, 151).
In 2009 the EU Commission published its views on the optional VAT-grouping scheme to the EU Parliament and the EU Council, in which the necessity for economic and organisational links between the members of VAT groups was reaffirmed (COM (2009) 325 (Final) at 3.3.4).
On 8 May 2014 the European Court published the German reference on the eligibility of partnerships to be members of VAT groups in Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG v Finanzamt Nordenham.
Therefore, the current areas of uncertainty in the UK rules are:
- the restriction of members of VAT groups to corporate bodies
- the subordination of the other group members to the representative member
- the lack of a requirement for economic and organisational links
- the extension of the effects of VAT groups cross-border
- (possibly) the requirement for HMRC’s approval for inclusion in the VAT group
What does the future hold?
The Explanatory Memorandum to Directive 77/388/EEC in the commentary on article 3.4 9 (the precursor to article 11 of Directive 2006/112/EC) states that the objective of the VAT grouping provisions was to allow administrative simplification and to combat abuse such as splitting, in cases where the independence of separate taxable persons was ‘purely a legal technicality’. The competitive advantages resulting from grouping, now in the limelight, were then merely acceptable side effects (see BFH v R 63/01 BStBl II 04, 434 (3.4.2003)).
UK anti-avoidance rules in paragraphs 1A and 2 of Schedule 1 to VATA 1994 provide that, for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT, HMRC can direct that those persons be treated as a single taxable person, where they are ‘closely bound to one another by financial, economic and organisational links’. This power to direct is the mirror-image of what should be required in sections 43 A – 43 D VATA 1994.
For the reasons set out above, I am of the opinion that the VAT grouping rules in sections 43 A – 43 D VATA 1994 are not properly implemented in UK law. EU compliant VAT grouping rules would allow a different choice of eligible entities. Partnerships might be covered in addition to corporates, but economic and organisational links would have to be established. It appears that HMRC initially thought that Skandia would not affect the UK position but it seems that they are now having to think again.
Under the German rules it is neither possible nor necessary to apply to become a member of a VAT group –it is the taxpayer who needs to assess whether at any time the eligibility criteria for a VAT group are met. There is no UK jurisprudence on the interpretation of the expression ‘financial, economic and organisational links’, however Germany has spent many decades exploring these matters. A look at where the Germans have got to may prove fruitful. After all, the EU VAT grouping rules were, when originally drafted, modelled on the German (and Dutch) VAT laws.
Angela Lang-Horgan is a German lawyer and a Chartered Tax Adviser who specialises in VAT, in particular, in relation to German/UK transactions. To contact Angela please click here.
*** UPDATE – August 2015***
On 10 February 2015 HMRC published Revenue and Customs Brief 2/2015 ‘VAT grouping rules and the Skandia judgement’. The section headed ‘VAT changes resulting from the judgment’ makes particularly interesting reading, ending, as it does, as follows:
‘These changes of treatment do not require any change to UK law they follow automatically in circumstances where the overseas establishment is recognised as part of a separate taxable person.’
Duh. (They’ll probably get away with it though). I’ll keep you posted.
This is interesting, believe me. In August 2015 the VAT Expert Group submitted a working paper to the Commission on the Skandia decision. The paper and annexe are available here. The rather unfortunately named VEG is formed of business and tax advisor representatives, and assists and advises the Commission on VAT matters. Wonder if it’s based in Brussels?
Tax lawyer specialising in business tax, SDLT and VAT