GPs with overseas offices could be hit with an increased tax bill following a ruling from the Court of Justice of the European Union.
In the case, Skatteverket v Skandia America Corp, the European court determined that Skandia’s Swedish branch became “independent” of its overseas head office by joining a variable added tax (VAT) group. Consequently, services supplied by Skandia’s overseas head office were subject to a reverse VAT charge on the Swedish VAT group’s VAT returns.
An example of this an a private funds context could be an investor relations team based in Hong Kong working for a predominantly UK-based fund manager which has set up a VAT group in the UK.
The ruling was a surprise to many as “it is an established principle of VAT that a head office providing services to its branch (or vice versa) is not making a supply for VAT purposes,” said Robert Facer, associate at accountancy firm Moore Stephens.
“The head office and branch are treated as a single entity for VAT purposes, as they do not act independently of each other. Therefore, any services passing between them are an internal transaction and outside the scope of the VAT system.”
Facer added that the ruling throws this principle in doubt and raises serious implications for businesses with similar structures – one VAT group and then a series of overseas offices.
He also suggested that the judgment will lead to a change of tax policy in the UK and expects the HMRC to issue formal policy guidance. “Businesses with a VAT group registration in the UK (or another EU member state) and an overseas head office or branch should review their position as a matter of urgency.”