Substantially higher tax bills for international businesses with branch structures – Tax.
28 October 2014
A recent European Court decision in the Skandia America Corporation (Skandia) case is likely to change the VAT liability of head office to branch charges where there’s a VAT group in place.
The risk for businesses is that international structures including VAT groups may, in the future, incur a VAT charge either in the UK, or another EU member state. The position for each business will be unique but this decision has the potential to add significant VAT costs to your business.
Many businesses are considering whether the procurement and recharging arrangements that they have in the Member States where VAT grouping is permitted will be affected by the imposition of additional VAT and, if so, how they can protect their position.
The Court held that a supply of services by a non-EU headquartered business to its branch situated in the EU is now liable to VAT – where that branch is part of a VAT group. VAT grouping allows many member states to treat two or more companies as a single entity for VAT, which means that transactions between members of a VAT group are ‘disregarded’ for VAT purposes. The Skandia decision could mean that supplies of services previously disregarded for VAT may now be liable to VAT rates of between 15% and 27%. This decision could result in additional VAT costs for partially exempt businesses (banks, insurers, education and charity sectors) who are unable to recover all their VAT.