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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)

1. Introduction

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 [2005] 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 interim.

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.

3. Background

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 been undervalued.'

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

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