Background to the case
Skandia America Corp (SAC) was the group procurement company for Skandia, the Swedish Insurance Group. SAC was head quartered in the US. It purchased third party services, such as IT solutions, from US providers free from VAT. SAC had a branch in Sweden that was included in the Skandia Swedish VAT group. SAC head office recharged the IT costs to its Swedish branch. SAC took the view that as it is a single legal entity there was no supply for VAT purposes between the head office and the Swedish branch and therefore no obligation to account for Swedish VAT on the recharge. The branch then supplied the IT services to other companies in the Swedish VAT group. As this was a supply within the VAT group Skandia asserted that no VAT was due on the charge. Therefore the Swedish trading entities received the IT solution without having to pay any VAT. This strategy is widely used by multi national groups within the FS sector.
The Swedish Authorities assessed the VAT group on the basis that Skandia Sverige (Sweden) was required to account for VAT on the charges that SAC made to other members of the Swedish VAT group.
Although acknowledging that there is generally not a supply between a head office and a branch the Court held that this basic rule does not apply when the branch is in a VAT Group. The Court opined that a VAT group was a separate taxable person for VAT purposes comprised of the individual members of the group. As a separate taxable person it was no longer a supply between ahead office and branch but between one taxable person (the head office) and another (the VAT group). As there was a supply the VAT group was required to account for the VAT arising on that supply on the reverse charge basis. In upholding the imposition of Swedish VAT, the ECJ has taken a different approach from the Swedish tax authority. Its judgement on the meaning of the VAT directive produces a significantly wider impact. The ECJ is effectively permitting taxation authorities to impose VAT on a cross border charge within a company. The Swedish tax authority imposed VAT only on the onward supply to other members of the VAT.
This is a very significant decision for the FS sector where this type of VAT mitigation strategy was common. The ECJ has opened the way for member states taxation authorities to impose VAT where either a branch or head office is in a VAT group and there is an inter-company recharge for services. Where domestic VAT law has or is amended to include such a charge there could be irrecoverable VAT.
Implications for UK VAT
The Skandia decision is of limited immediate impact in the UK. In the UK there are anti-avoidance rules to crystallise a VAT charge where a foreign head office supplies bought-in services to its branch in a UK VAT group for onward supply within the VAT group. Although this decision specifically concerned services bought in from an external IT provider the logic of the decision would seem equally to apply where internal head office costs are recharged to a UK branch. If the UK or indeed other member states seek to apply the case to internal as well as external cost recharges the impact of the case will be even more significant.
Any business that has inter company recharges coming into a VAT group in any member state of the EU should consider the impact of this decision.
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