HM Revenue and Customs Brief 16/11
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Issued 25 March 2011
VAT: reverse charges within VAT groups – legislating a VAT
grouping Extra Statutory Concession (ESC 3.2.2)
HM Revenue & Customs (HMRC) have a published Extra
Statutory Concession (ESC) covering how a tax charge applicable to VAT
groups should be calculated (ESC 3.2.2). HMRC is reviewing all its ESCs
following the Wilkinson decision (R v HM Commissioners of Inland
Revenue ex p Wilkinson  UKHL 30). ESC3.2.2 is not ‘Wilkinson’
compliant. The Government intends to legislate to give statutory effect
to ESC 3.2.2. This Brief sets out how the ESC should be applied in the
2. Who needs to read this?
This ESC affects UK VAT groups with an overseas member that
buys services from persons outside the VAT group and uses them to make
supplies to the UK members.
A VAT group comprises two or more corporate bodies under
common control within a single VAT registration. A VAT group can
contain members that are established overseas provided that they are
also established in the UK. Transactions between members of a VAT group
are normally disregarded for VAT purposes.
In the mid-1990s a VAT avoidance scheme allowed partly exempt
VAT groups to avoid paying VAT on certain services they bought in. The
services involved were those where the VAT is accounted for by the
customer. Services used in the UK would be bought by a VAT group member
abroad so that UK VAT would not be charged (the supply being made
outside the UK and thus outside the scope of UK VAT). The services
would then be routed to the UK user via an intra-VAT group charge. As
intra-VAT group charges were ignored for VAT purposes no VAT was
chargeable at that point either. The net result was VAT-free services.
Anti-avoidance legislation was enacted in 1997 requiring a
tax charge to be declared on certain supplies by the overseas members
to the UK members of the group. The tax charge arose where:
- the supply incorporated services bought by the overseas
member that would be treated as supplied here if bought by the UK
members ('reverse charge services')
- and the supply was taxable and itself would have been
treated as supplied in the UK
The legislation applied the tax charge to the whole
intra-group transaction whereas the avoidance scheme only related to
services bought in from third parties.
4. The purpose of the ESC
ESC 3.2.2 was brought in to ensure that the anti-avoidance
provision was limited to removing the tax advantage from such
structures. The following is an extract from ESC 3.2.2:
'…the amount of the tax charge…is calculated with reference
to the value of the supply by the overseas member to the UK member. By
concession, the value for calculating the tax charge may be reduced to
the value of the Schedule 5 services purchased by the overseas group
member, provided that the group is in a position to provide evidence in
the UK of the value of those services, and that those services have not
The ESC works by restricting the tax charge to the value of
reverse charge services bought in by the overseas member. These
services were listed in Schedule 5 VAT Act 1994.
5. Changes to place of supply of services (POSS) rules
On 1 January 2010 the POSS rules changed. The general rule
determining where a supply was made for business to business
transactions changed from the place where the supplier belongs to where
the customer belongs. As a result of this change, Schedule 5 became
redundant and was repealed.
6. How ESC 3.2.2 should be applied until it is legislated
Where a group makes use of this ESC, it should be applied in a
way that maintains its intended effect. To achieve this, the reference
to Schedule 5 should be read as a reference to the new general rule for
supplies to businesses, in VATA 1994 s7A(2)(a). The ESC will continue
to allow VAT groups to value the tax charge by reference to the
services the overseas member has bought in that would now be treated as
subject to UK VAT if the UK group member bought them direct. Evidence
of the value of the services bought in, and that they have not been
undervalued, will still be needed.
7. Legislating ESC 3.2.2
The Government will commence a technical consultation with
stakeholders in May 2011.
About the Author
© Crown Copyright 2011.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2011-03-29 12:43:39 in Tax Articles