Changes to overseas VAT groups: the impact for charities

A recent decision from the European Court of Justice (ECJ) in the appeal of Skandia International, an international investment company, is likely to create additional VAT costs for some charities that operate in different jurisdictions. The decision impacts on arrangements where a non-EU headquartered entity:

  • has a branch in an EU country
  • is VAT grouped with other entities in that EU country
  • provides services from its non-EU head office to the EU branch

In such circumstances the ruling has held that the EU VAT group must self-account for VAT on the services received from the non-EU entity under the reverse charge.

Previously, the widely held view was that no VAT was due on the services since they were supplied between two branches of the same legal entity. If they were then supplied onward to other members of the VAT group, no VAT would be charged since this was an intra VAT group supply.

Many charities with international branch structures are members of a UK VAT group registration and this decision raises several questions and matters that should be considered:

What kind of fixed establishments do you have in overseas territories?  Some charities in the UK have a presence in overseas territories in order to fulfil their charitable objectives and some will have a number of UK employees and a base location office space to support their charitable activities.  This function is often deemed to be a branch for the purposes of VAT and thus the costs of a charity operating such a representative office could give rise to a 20% VAT charge in future.

  • There could be other types of branch operations in overseas territories, such as overseas branches of UK subsidiaries, which could give rise to a UK VAT charge.
  • Is there a supply by the overseas establishment to the charity’s VAT group?  Structuring arrangements so that there is no supply could be a defence to a VAT charge arising but this will depend upon a number of factors including the way HMRC alters UK law to implement Skandia. 

We don’t yet know what HMRC's reaction will be to the decision or when UK law will be altered to comply.  For example, it is conceivable that they would not distinguish between situations where the non-EU entity is headquartered outside the EU with a UK branch and those where the entity is headquartered in the UK with a branch inside or outside the EU and this will almost certainly create an additional VAT cost for some charities.