Skandia principle extended

The ECJ has held that the principle established in the Skandia case (Case C‑7/13) applies equally to a situation involving a principal establishment which is part of a VAT group and its non-VAT grouped branch established in a different member state: Danske Bank A/S v Skatteverket (Case C‑812/19). The fact that the principal establishment was part of separate VAT group from its branch took precedence over the normal analysis in which transactions between a branch and its principal establishment are ignored for VAT purposes (FCE Bank (Case C‑210/04)).

The decision will have important ramifications for EU based businesses with branches in different member states. The impact on the UK is less clear - though possibly no less important - as the decision is both after the end of the transition period (and so not part of retained EU law) and the UK has historically applied a different, "whole entity" approach to VAT grouping to other jurisdictions. On this point, the fact that the ECJ has stressed the territorial limitations of VAT grouping may call into question this approach entirely.

Background

The Skandia case concerned supplies of services between a separately VAT group registered fixed establishment and the company of which it formed part. The ECJ held that in that scenario, the well-known principle from FCE Bank that intra-entity transactions do not give rise to a supply is switched off and there is no disregard of VAT for transactions between head office and the branch.

The Danske Bank case concerns the reverse situation. The Danske Bank head office was part of a VAT group in Denmark. However, Danske Bank also had a branch situated in Sweden which was not part of any VAT group. Danske Bank head office was responsible for procuring certain services that were used by the group as a whole, including IT services. It recharged the Swedish branch in respect of its proportionate part of the costs of these IT services and a question arose as to whether VAT was reverse chargeable on those recharges in Sweden. Danske Bank argued that there was no supply between the head office and branch as they were part of the same entity. It was just an internal movement of funds and gave rise to no supply for VAT purposes on the basis of the FCE Bank decision.

The Swedish tax authorities, however, considered that the fact that the Danish head office was part of a VAT group meant that it had to be treated as a separate entity for VAT purposes, following the logic of the ECJ's decision in Skandia. As such, the Swedish branch was required to reverse charge VAT on the IT services supplied to it by its Danish head office.

Decision of the ECJ

The ECJ has held that the principle set out in Skandia applies equally to the situation where it is the head office that is part of a VAT group. A VAT group forms a separate, single taxable person and that, in essence, supersedes the individuality of the group members. Therefore, supplies between branches and head offices are supplies for VAT purposes where one is part of a VAT group and the other is not.

"It follows that, where the principal establishment and branch of a company are situated in different Member States and one belongs to a VAT group, the legal relationship between them must be assessed by taking account, first, of the fact that that group is placed on the same footing as a single taxable person and, second, of the territorial limits of that group."

The ECJ rejected Danske Bank's attempts to distinguish this case from Skandia. It made no difference that this case involved supplies from a VAT grouped principal establishment to its branch in another Member State rather than from a VAT grouped branch. Equally, Danske Bank could not rely on the principle of fiscal neutrality as the situation involving a supply between a VAT group and a branch cannot be regarded as similar to a transaction between head office and branch where there is no VAT group involved.  

In fact, the decision goes further and emphasises the territorial limitations of the VAT grouping provisions. "The very wording of Article 11 contains a territorial limitation, such that a Member State may not provide for a VAT group to include persons established in another Member State." As a result, the ECJ stressed that the Swedish branch of Danske Bank could not be regarded as forming part of the Danish VAT group in question.

Comment

It probably should not come as a surprise that the ECJ has followed through the logic of the Skandia Bank decision and held that recharges from a VAT grouped head office to a separate branch should equally be subject to VAT. Indeed, the ECJ dispensed with the need for an AG opinion in this case, indicating that if considered that the decision was straightforward.

However, the comments on the territorial limitations go further and may call into question the approach to VAT grouping applied in the UK and certain other Member States, such as Ireland. The judgment suggests, in effect, that VAT groups should be limited to a particular jurisdiction. Accordingly,

establishments in a different jurisdiction may not be treated as members of that group. However, under the current UK rules, which apply a "whole entity" approach to VAT grouping, VAT groups are not so limited and overseas establishments may be treated as members of a local VAT group - though this is complicated by the treatment in the other jurisdiction.

The Skandia Bank case led to HMRC guidance published in Revenue & Customs Brief 2/2015 that where a supply is made between a UK group member and an establishment in another Member State that treats that establishment as a separate entity for VAT purposes, then the supply would no longer be disregarded for UK VAT purposes.  In practice, this need to consider the position in the other jurisdiction has led to practical difficulties for taxpayers in correctly taxing relevant intra-entity transactions, not least as a number of EU27 jurisdictions have similarly changed their approach to these rules in light of Skandia.

As a result, the government recently published a Call for Evidence on aspects of the UK's VAT grouping rules. The HM Treasury document, "VAT Grouping - Establishment, Eligibility and Registration", seeks industry feedback on a range of specific issues around the UK's VAT grouping rules, including application to branches and implementation of the Skandia judgment.

The consequences of the Danske Bank decision in the UK are further complicated by Brexit. Since the decision was delivered after the end of the transition period, it is not binding on the UK courts as retained EU law - though it will still be influential. Clearly, however, it would be helpful for HMRC to move quickly and provide guidance on the implications for the UK's "whole entity" approach to VAT grouping.