Skandia: New limits for VAT groups


The ECJ has handed down another important judgment for VAT groups which will have far reaching consequences through all EU Member States.

Skandia America Corp (C-7/13, 17 September 2014) concerned a Swedish VAT group of which a branch of a US company (SAC) was a member. The head office of SAC provided outsourced services to its branch as part of the VAT group. The taxpayer, relying on FCE Bank (C-210/04), argued that there could be no supply between the head office and its branch as the branch did not operate independently of its parent economically, so could not itself be characterised as a taxable person. The court held however that since the VAT group of which the branch was part was treated as a single taxable person, any supply by the head office was made not to the branch but to the VAT group and therefore to a separate taxable person. VAT would need to be charged on the provision of the outsourced services for a consideration.

The effect of this decision looks likely to increase VAT costs for banks and insurers and other partly exempt groups in the EU, although the impact in each jurisdiction will depend on existing practice and the precise nature of the VAT grouping conditions. In the UK, where the case is likely to have particular impact, the previous practice has been to accept non-taxation of such transactions. We await public comment from HMRC on how they intend to interpret and implement the judgment. Other jurisdictions may already tax such transactions.

Taxpayers will be keen to have clarity on the impact of the case in those member states which operate VAT grouping as well as those who do not, including whether it is to be applied where services are provided by domestic branches to non-domestic VAT groups or where head offices are within (rather than outside) the EU. The full effect of the case could include positive as well as negative VAT consequences depending on certain factors.

The full implications of the case will only be known in time as national tax authorities confirm their approach to implementation. Taxpayers, wherever their head office is established, should be considering the potential impact and the scope for limiting any adverse effect on their activities.