19 March 2019 - Article
The CJEU has bowled us all a googly in the form of its decision concerning the international trade of Skandia and how this is taxed in Sweden.
The issues are so arcane that they involve a 'cold towel' analysis. It relates specifically to VAT group registrations. It only applies where one or more members of the group has branches (including potentially the headquarters) outside of the country in which the VAT group is resident. For instance, say that an American company has a branch of the same legal entity in Sweden. That branch must have human and technical resources, but if it does, it could theoretically form a VAT group registration with other Swedish companies as long as they are all under common control.
In the normal course of events, any 'services' provided by the American branch to the Swedish branch would not be regarded as a taxable activity for VAT purposes, because one cannot sell something to oneself. However, the CJEU supported the Swedish Government's analysis that any provision of services from the American to the Swedish branch, which was then used across the VAT group as a whole, involved a 'reverse charge' on the value of the imported service. This would normally only apply where one was purchasing a service from a different legal entity, but they claimed that it applied in this intra-branch situation.
The UK VAT group rules do not follow this approach. There are specific rules for taxing services bought from third parties by overseas branches and then transferred for the use of the UK branch, but this is to avoid the distortion of shopping abroad when the economic position is really that the service has been imported from a third party. The Swedish model goes far further, and actually states that there is a charge where the services in question are generated from within the resources of the company itself (such as, from its own employees).
So, it is clear that the UK approach does not sit happily with either the Swedish or the CJEU approach. At first blush one would then think that the UK has to change its approach, which is damaging to UK business. But HMRC have thought carefully about this, and in their Brief 2(2015) they draw an interesting distinction between Sweden and the UK.
At this point I advise you to reach for the cold towel.
In Sweden, the VAT group registration is deemed only to include the actual branch of the company which happens to be located in Sweden. It does not include any branches outside Sweden. In the UK, the group registration is deemed to include the entire legal entity. It can only have formed part of the group if it had a UK branch, but once it is qualified under that heading, the entire company is deemed to be part of the VAT group. On that basis, so HMRC says, the Swedish approach whereby there is deemed to be a 'transaction' on the transfer of services from an overseas branch to a Swedish branch does not apply in the UK, since the entire legal entity is within the group already. This kind of distinction makes the famous analogy of considering the number of angels that can stand on the head of a pin seem relatively straightforward. Is there really any difference between Sweden and the UK? No-one in their right minds would think so.
But the distinction, however metaphysical it may seem, is important here. As the UK operates this wider view of VAT grouping, it believes that it need not apply the CJEU's decision in the Skandia case. However, it does not feel able to ignore the fact that other member states, with Sweden as their head, apply a different rule. We therefore have the Gilbertian situation of HMRC having to state that any transfer of services from one of the member states which applies the Swedish model of VAT grouping to a UK branch which happens to be a member of a UK VAT group would involve a VAT charge upon importation into the UK. This is because it does not feel able to ignore the fact that the Swedish VAT group treatment deems the branch to be separate from the UK branch. However, where any other member state does not operate VAT grouping, or where the VAT grouping regime is like it is in the UK, the same does not apply.
HMRC has not found out which other states, apart from Sweden, operate the 'branch-only' structure. They are going to look into it and will get back to us. They have time to do this, since they do not intend to commence this approach to VAT accounting until 1 January 2016.
When they finally tell us which countries are causing the problems, our businesses can consider closing the branches in those countries in order to avoid a pointless VAT charge in the movement of services to and fro. So, that will harm Sweden, and any other country which operates this imaginative but unconvincing approach to VAT group registration. Meanwhile, any movement of services from a non-EU branch into the UK VAT group should by definition not be caught by the new regime, to the considerable advantage of businesses with branches outside of the European Union.
So, yet another self-inflicted wound by the CJEU on the EU. It is easier to trade across border outside the EU than within it. Even within the EU these rules are inconsistent and therefore create barriers to trade between countries. The point in question is so arcane as to be the object of ridicule. HMRC's announcement simply drips reluctance, bordering on dismay. The CJEU has let us down yet again.